ETHIOPIA: A NEW COMMERCIAL CODE
Investors looking to enter the Ethiopian market or deepen
their presence should seek to familiarize themselves with
some recent legislative changes of the country's commercial
law that are set to significantly alter the legal landscape for
both local and international players.
Chief among those is the new commercial code (the "NCC"),
approved by the House of Peoples Representatives on
25 March 2021. It replaces the former code that had been in
force for 62 years (the "1960 Code"). In this briefing, prepared
by Anthony Giustini and Nadezhda Varbanova (from Clifford
Chance)1 and Tadesse and Dadimos LLP ("TDL"), we look at
the key changes brought about by the NCC.
It is worth noting that the NCC only replaces Books I, II and V
of the 1960 Code (which cover traders, business
organizations and insolvency). Books III (on carriage and
insurance) and IV (on negotiable instruments and banking
transactions) of the 1960 Code will remain in force until they
are eventually replaced by the Financial Services Code, which
is yet to be approved by the House of Peoples
Representatives.
BUSINESS ORGANISATIONS
Introducing One Person Private Limited Companies ("OPPLC")
The 1960 Code only provided for two types of companies – share companies
(the equivalent of the English public limited company) and private limited
companies ("PLC") (the equivalent of the private company limited by shares).
The former requires a minimum of five members in order to be created, while
the latter a minimum of two, leading in practice to many issues linked to the
artificial association of partners for the sole reason of meeting the minimum
number of shareholders. This requirement was particularly challenging for foreign investors who were expected to find partners. The NCC appears to
solve this by allowing, in Title VII, the formation of companies by the unilateral
declaration of a single member, referred to as OPPLC. However, further
measures may be necessary because although the NCC does not expressly
state that OPPLC can only be established by a natural person, the provisions
governing OPPLC seem to imply that OPPLC is only allowed to be established
by a natural person (and thus the code does not unequivocally support
investments through holding companies).
Recognition of "groups" of companies
Another feature of the NCC is that Ethiopian law now recognises the concept
of "groups of companies", which may be of interest to investors wishing to set
up multiple entities in the country (art. 550). To that effect, the NCC defines a
"group" as an economic entity comprising a parent company and both
domestic and foreign subsidiaries. It also defines the terms "subsidiary",
"parent company", "wholly owned company" and "control", thus providing the
framework for group companies and certain governance practices (art. 551
and seq.).
Furthermore, the NCC provides for a holding company to have the right to
access information on its subsidiary (art. 557) and give instructions to the
management of its subsidiary (art. 556), and the right to redeem the shares of
a shareholder with less than 10% of the shares (art. 558).
Recognition of branches of foreign business organizations
In contrast with the 1960 Code, the NCC introduces provisions that regulate
branches of foreign business organisations. The NCC allows foreign business
organisations to carry out their business through their branches in Ethiopia,
provided the branch (i) is registered in the Commercial Register kept by the
Ministry of Trade and Regional Integration and (ii) has its own manager.
The NCC defines a "branch" as a fixed establishment of a foreign business
organisation or a similar entity that is staffed and set up to pursue economic
activity for gain on behalf and for the account of the said business organisation
or similar entity for a definite or indefinite period (art. 578 and seq.). According
to the NCC, a branch does not have an autonomous legal entity distinct from
that of the entity that owns it. In addition, the rights and obligations arising
from its activity are part of the assets of the entity that owns it.
CERTAIN ASPECTS OF COMPANY FORMATION AND OPERATION
As a general matter, the drafters of the NCC have taken a number of steps to
increase corporate transparency and ease of doing business in the country.
Requiring only a Memorandum of Association (MOA) for company formation
Whereas in the 1960 Code it was required that a company have both a
memorandum of association and articles of association (AOA), only the former
is required under the NCC, thus significantly simplifying the company creation
process in Ethiopia.
Prohibition of the issuance of bearer shares
Under the 1960 Code, shareholders could either request bearer shares or
registered shares. In an attempt to provide meaningful regulation and to
improve anti-money laundering efforts, the NCC formally prohibits the
issuance of bearer shares and only allows the issuance of shares registered in
the name of the shareholder (art. 267). The NCC further requires that holders
of bearer shares convert their shares into registered ones via application
made to the issuing company within three years from the date of publication of
the NCC in the Federal Negarit Gazeta. Bearer shares that are not converted
within this time will cease to confer membership rights to their holders.
Share companies
The NCC allows non-shareholders to become directors so long as their
number does not exceed a third of the total number of directors (art. 296). This
aligns with international best practice in so far as the board may now include
independent and/or professional board members.
It is mandatory to establish an audit committee in the board of directors
consisting of members of the board alone. A director who takes part in the
day-to-day management of the affairs of the company cannot become a
member of the audit committee (art. 301(3)).
In another departure from the 1960 Code, a share company may (without this
being mandatory) now provide in its MOA for a supervisory board (in addition
to the executive board) (art. 331). Interestingly, the NCC does not introduce
mandatory employee representation in the board – a practice often associated
with two-tiered boards.
Private limited companies (PLCs)
In relation to PLCs, the main revision is that they now have the option of
choosing to be managed by a board of directors (art. 518) rather than by one
or more managers under the 1960 Code. A PLC must still have a general
manager, but where it has elected to have a board of directors, the general
manager must be chosen by the board (art. 514).
Moreover, where the 1960 Code was silent about the pledging or the giving of
shares of a PLC in usufruct, the NCC, explicitly permits shares of a PLC to be
pledged or given in usufruct. In such a case, the right to vote at meetings is,
unless otherwise agreed, exercised only by the pledgor or the person who
gave it in usufruct (art. 505).
On a further note, it is now a mandatory requirement for PLCs to have an
independent and impartial auditor when they are composed of ten members or
more or possess a total asset value in excess of ten million Ethiopian Birr (art.
518).
TAKEOVERS AND SHARE TRANSFERS
With respect to takeovers and share transfers, the NCC has introduced a
number of rules specifically regarding share companies which should, in
theory, open the door to further inbound M&A activity.
For instance, where a bidder is making an offer for 50% or more of the shares
in a company, such bidder is required to make a tender offer to all the
shareholders (art. 293).
The NCC also contains "squeeze out" and "sell out" provisions. The NCC
entitles a parent company controlling more than 90% of the shares and votes
of a subsidiary to purchase the remaining shares (art. 558). Likewise, if a
parent company owns directly or indirectly more than 90% of the shares with
voting rights in a subsidiary, the other shareholders can request their shares
be purchased by the parent company (art. 562). The shareholders of a
subsidiary can request in court that the parent company or another person
designated by it purchase their shares.
Bankruptcy remoteness
The NCC further regulates jurisdictional issues and remoteness in bankruptcy
proceedings (art. 601). There were no such rules in the 1960 Code.
Accordingly, each member in a group is treated as separate and, therefore,
deemed independent from other member companies in the group.
Consequently, extending a proceeding to other member company(ies) of a
group is not possible.
Cross-border insolvency and jurisdiction
Finally, in departure from the 1960 Code, which did not regulate international
bankruptcy, the NCC has expressly adopted the principle of "centre of main
interest test" for the adjudication of cross-border insolvency, and also provides
that a judgment opening preventive restructuring proceedings, reorganisation
proceedings and bankruptcy proceedings with respect to a debtor having its
centre of main interest in Ethiopia shall have universal effect (art. 602). In
addition, the NCC provides that Ethiopian courts have jurisdiction to open
territorial proceedings if an establishment of a debtor is in Ethiopia, and in this
regard, the effect of territorial proceedings of the debtor having an
establishment in Ethiopia is restricted to the assets of the debtor situated in
the territory of Ethiopia.
Moreover, a related concern with cross-border insolvency is the recognition
and enforcement of foreign judgments in relation to bankruptcy. While the
1960 Code did not contain provisions on recognition and enforcement of
foreign proceedings and insolvency related judgments, the NCC sets forth the
conditions to be fulfilled for the recognition and enforcement of foreign
judgment, as well as the documents a person must submit along with its
application for enforcement of the proceedings in Ethiopia (art. 603).
CONCLUSION
The changes introduced by the NCC bring the country's legal landscape
further in line with international standards. More flexible group structures, the
introduction of a degree of independence for company management and
standardised M&A rules, as well as an overhaul of the insolvency regime
should be of interest to foreign investors. Of course, it remains to be seen
whether the changes in commercial legislation will result in the levels and
types of investment the Ethiopian state is hoping to attract, but the NCC
definitely goes a long way in providing some certainty to local and international
businesses
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