Why revision?
q Commercial law plays crucial role in regulating the practice of the
economic community and thereby ensuring the existence of the smooth, stable
and fair Commercial practice, the revision of the old Commercial Code is an
encouraging legal development that will hopefully bring a positive impact in
the Commercial arena.
q In this regard, it may not be
difficult to imagine the factors that induced the revision of the old
Commercial Code as there have been significant changes over the last
five to six decades as to the types and manner of conducting business.
q Technological advancement, globalization,
the emergence of the new commercial activities that have not been under the
umbrella of Commercial activities, for one or another reasons, can be some of
the reasons that have necessitated the revision
q The ECC has outlived the estimated
life span given to it by its drafters. The drafters of the code did not intend
the code would remain enforce for such long time.
q Changes taking place in the rest of
the world, especially those occurring in investor countries necessitated to be
reflected in our code.
q Particularly, the need to be
sufficiently reflect development in information, and communication technology;
recognition of new forms bos etc.
q The foreign commercial code based on
which the code was originally drafted had undergone many rounds of revisions
q The revision process has been there
for quite a long time.
q The amendment is introduced at the
time whereby the Ethiopian government takes other initiatives aimed at changing
its overall legal environment.
q The new commercial code did not
completely change everything from the old, though there are many important
changes introduced.
Changes introduced
Structure of the Code
q The major changes made in the new
Commercial Code starts with the structure of the Code since the part of the old
Commercial Code that deals with Banking, Insurance and negotiable instruments
were taken out of the new Commercial code.
q The old Code contains:
q Book I Traders and Businesses
Articles 1-209
q Book II Business Organizations
Articles 210-560
q Book III Carriage and Insurance
Articles 561-714
q Book IV Negotiable Instruments and
Banking Transactions Articles 715-967
q Book V Bankruptcy and Schemes of
Arrangement Article 968-1170
Book VI Transitory Provisions Articles 1171-1182
q Thus, the Code has been separated
into commercial code and financial services code. Thus,
q Book I (on traders), Book II (on
business organizations) and Book V (on bankruptcy) of the old code are now
enacted as Commercial Code.
q Book III (on carriage &
insurance) and Book IV (on banking and negotiable instruments) from the old are
to be separately enacted as Financial Services Code, the latter yet to
promulgated.
q Formerly, the laws that regulate
Banking Business, Insurance and negotiable instruments existed in a
dispersed manner with some aspects of these businesses being regulated under
the Commercial Code while other aspects were regulated by proclamations.
q The amendment has replaced only Book
I, Book II, and Book V. The articles in the other books will remain effective.
Thus, the old commercial code will remain in force in relation to Book III and
IV, until the Financial Services Code is approved by the Parliament.
q In relation to Business
Organizations, the most important introduction is the recognition of ‘One man
Company’ and Limited Liability Partnership.’
q The new Commercial Code permits the
formation of a one-person company which is a business organization incorporated
by the unilateral declaration of a single person. (174 (7))
q It enjoys a legal personality
autonomous or separate from the person forming it and its liability is limited
to the extent of the contribution that the person makes into the company.
q (Art. 534 ff,) (Art. 537 importance
of nominee) (Art. 538 on conversion), (Art. 539 it can not form another one-man
company) (Art. 543. Exception to Liability of the Member) (Art. 544.
Peculiarity regarding Dissolution and Liquidation) (Art. 545. Applicability of
Rules governing PLC to one-man plc)
q Consequently, one individual person
is able to form a limited company, the form which is form very suitable to sole
proprietors.
q Ordinary partnership is eliminated.
q There has always been confusion as
to the nature and purpose of an ordinary partnership due its characterization
as a non-commercial business organization.
q No business has been organized in
this form making it meaningless to retain.
q Introduction of limited liability
partnership (Art, 174, 221)
q The introduction of LLP has an
important role in facilitating to bring professionals together and thereby
enable them to join their professional expertise together and render
professional service with higher quality.
q Regulation of group of companies: it
acknowledges the structuring option of setting up groups of companies including
wholly owned subsidiary. (Art. 550 ff,
601)
q It provides a definition for a
Group, Subsidiary companies. See art. 550-554 ff
q The Code defined Group as
consisting of a set of companies comprising of the parent company and all its
national and foreign subsidiaries, unless otherwise indicated,
q whereas a Subsidiary is
defined as a company subjected to the control of another company, the “Parent”
company, either directly or indirectly through another subsidiary.
q The Code defines control as the
power to govern, alone or with other shareholders, the financial and operating
policies of a subsidiary.
q A more nuanced definition is
provided for branch company as well.
(Arts. 578, 108)
q Has recognized holding companies as
traders (Arts. 9, 431), though they do not necessarily produce goods or service
but merely holds shares in other companies by injecting capital into such
companies.
q Merger and Divisions: Unlike the Old Code, the New Code
has introduced definition of merger and divisions explicitly and provided for
the various ways that they take place. Art. 565…ff
q Provisions of the section dealing
with merger and division have to be seen in the light of their compatibility
with the competition law regime which governs them currently.
q The new Code also has detailed
provisions on the Bankruptcy issue in line with international standards as
opposed to the former Code that contained only few provisions.
q Book V Bankruptcy and Schemes of
Arrangement Article 968-1170
q In addition to providing detailed
provisions on bankruptcy procedure, the new Code also provided procedure for
insolvency.
q Distinction as commercial and non-commercial business
organizations abolished.
q These days the legal significance of
demarcating business organizations into civil and commercial does not carry the
weight that it used to have in the earlier times.
q The demise of this traditional
difference reveals itself in the move many nations take.
q The introduction of supervisory
board Art. 331
q The other new introduction into the
new Commercial Code is the adoption of a optional two tier Board of Directors
structure of a Share Company by introducing ’Management Board’ and Supervisory
Board.
q Introduction of SB can be considered
as a move towards stakeholders’ approach.
q It also advances the Corporate Governance
of the Companies.
q The permission of
outside/non-shareholder directors Art. 296 (2).
q In addition to introducing two tier
Board of Directors, the new law has also introduced non- shareholder members of
the Board of Directors as opposed to the former Code that requires being a
share- holder to be a member of a Board of Director.
q The right of members of a PLC to
form a Board as a management body is clearly recognized (Art. 513)
q Attempted to separate executive and
non-executive directors. See art. 296 (1) (514 (2) for PLC).
Definition of traders
— [Art. 5 Old Code] Persons who professionally
and for gain carry on any of the following activities shall be deemed to be
traders
— [Art. 5 the Draft Code] Persons
who professionally and for gain carry on, among others, any of the
following activities as trade shall be deemed to be traders.
— [Art. 5 the New Code] Persons who
professionally and for gain carry on any of the following activities or
similar activities shall be deemed to be traders.
— What is the difference between the
old, draft and new codes?
Commercial Activities
— In the old code the lists of
activities considered as commercial was meant to be exhaustive, the new
code’s list is meant to be indicative or illustrative.
— So, according to the new Code, the
concerned authority may designate a given activity as commercial though not
listed.
— Under the old Code, new activity
could only be added by other special laws.
— See Art. 2 (2) of Commercial
Registration and Licensing Proclamation No.980/2016 ““business person” means
any person who professionally and for gain carries on any of the activities
specified in the Commercial Code or who dispenses services, or who carries
on those commercial activities designated as such by law”
— Activities expanded from 21 in old
Code to 37 in the new.
— What are the new activities added to
the list and why?
Technology recognition and Further
Changes
— In relation to different kinds
of meetings of Share Companies, the new law recognized electronic meetings.
— Meetings via video conference or
other means of communications have been recognized as legitimate
— This is a good effort in modernizing
the trade environment in line with technological advancement. (Art. 520, 493
(2))
— The new code also requires Share
Company to have a website. Art.
492 (detail regulation 493 ff)
— The Code retains the key obligation
of traders to keep books of account exempting what it refers to “petty traders”
to be defined in a special law.
— But, it also recognized the
possibility to keep books of account supported by modern technology while
eliminating the provisions detailing how journals, balance sheet and
inventories are to be organized which out-dated.
— While the obligation to register
business does exist in the old Code, the new Code requires the registrations at
the Federal Register and the Regional Register.
— It also imposes an obligation on the
Ministry of Trade and Industry to establish a federal level electronic
database accessible to the public online.
Others
— Article of association is no more
required to establish Business organization.
— Incorporation will be effected by
the memorandum of association alone together with other documentations.
— In practice the two document
requirement served little purpose as incorporators often reproduced the same
instrument with two names.
— This will make company formation
simpler.
— Separate provisions provided for
founders and promoters.
Minority
Shareholders
— Compared to the 1960 Commercial
Code, the amended Commercial Code has made notable improvements in terms of
protecting the interests of minority shareholders in share companies such as:-
— Article 292: New provision on
mandatory bid- under this provision when a single shareholder acquires 90% or
more of the shares of a company, a minority shareholder can compel such
controlling shareholder to buy his/her shares
— Article 328: The right to institute action
against directors- Ethiopian law doesn’t allow derivative suit by shareholder
on behalf of the company
— Article 351- minority shareholders
representing at least 10 of the share capital can request the auditor of the
company to convene a general meeting of shareholders. 20% in the old code.
— Article 366(3)-Only 5% shareholding
is enough to request the court to order the convocation of a general meeting of
shareholders. 10% in the old.
— Article 381 & 382-access to
documents:- the biggest obstacle for minority shareholders is accessing documents
to prove suspicions of mismanagement. Various requirements in the old code.
— Article 396-special
inspection/audit:-shareholders representing 10% shares can request the company
or the court to appoint a special inspector to investigate suspicious
transactions.
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