Ethiopia's Commercial Code Joins 21st Century

Apr 3 , 2021
By Yehualashet Tamiru Tegegn

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The same Commercial Code was kept to govern economic activities under regimes with radically different economic systems. The amendment, in its current form, should allow for a reflection of the free-market policies Ethiopia is increasingly flirting with, writes Yehualashet Tamiru Tegegn (yehuala5779@gmail.com), adjunct lecturer at Addis Abeba University and an associate at MTA.

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Parliament unanimously passed the revised Commercial Code late last month, over six decades after it was first put in place. Legislated in 1960 during the Imperial Era, it was far ahead of Ethiopia's stage of development. But much has changed since then, necessitating an amendment. It is also overdue as Ethiopia has been moving toward a free-market economic system since 1991 and much more sharply after 2018.

Hence, it had proved to be inadequate for the level of economic activity in Ethiopia today, much less the requirements of the decades ahead. It also contained many provisions that were difficult to implement and were subject to different interpretations.  It was imperative to revise the existing law and strike the right balance between investors, traders and consumers to improve economic activity and the living standard of citizens.

The old Commercial Code identified 21 activities that could be considered commercial – if a person engaged in these economic activities professionally and for gain, they would be deemed a trader. The amendment expands the list to 37 different economic activities. The additional ones include operating trade fairs, organising and coordinating meetings, and operating news and any information transmission services.

An economic activity carried on for profit that is owned by one person is called a sole proprietorship. If two or more persons are engaged in economic activity, they have to form a business organisation. As a result, the concept of a one-person company was alien to the old Commercial Code. However, the new one introduces this concept even though a business organisation continues to be defined as an association established through a Memorandum of Association by persons who intend to cooperate in undertaking an economic activity. Despite this, for the Code, a one-person company is considered an “association” established by the unilateral declaration made before the Document Authentication & Registration Agency (DARA).

There was also no concept of limited liability partnership (LLP) under the previous Code. The amendment defines it as a business organisation formed by two or more persons to render professional services and whose liability is limited to the extent of their contributions. Only persons licensed by the appropriate organ to provide a professional service may become partners. Like other forms of business organisations, the legal personality of an LLP is quite distinct from the legal personality of the partners.

Of no lesser consequence is introducing a mandatory tender offer (MTO), which is founded on two principles. Primarily, a shareholder should have the right to sell his share(s) if control of the company changes hands. It is wrong to compel shareholders to become minority shareholders in a company without giving them the option to sell their shares. MTO also requires the acquirer to bid the same price to all shareholders, regardless of whether they hold controlling positions or not. This requirement will effectively exclude price-differentiated tender offers. A person who intends to buy shares representing half or more of a company's capital shall make a tender offer to all shareholders of the company. Moreover, any shareholder holding more than 90pc of the shares in a company may demand that minority shareholders have their shares redeemed by that shareholder. These changes will have repercussions for share companies that are sure to make a difference.

Another change that will reverberate is adjustments to rules on the supervision of corporate management. There are two main types: one-tier and two-tier boards. There was no supervisor board under the old Commercial Code; control of managing the board's directors was just an additional task of the board itself.

However, the new Commercial Code makes a drastic shift in this regard by introducing a two-tier board system where the management of directors of the board lies with a separate supervisory board. Members of the supervisory board may neither be members of the board of directors nor participants in the company's general management.

The supervisory board has, among other things, the following powers and mandates: cause the submission of documents and other information necessary to discharge its responsibility and examine the same; call and lead a general meeting where the board of directors are unable or not willing to convene such a meeting; and present and take part in the meeting of board of directors without voting.

But perhaps the most critical improvement in the new Commercial Code is the change in tone in how it deals with businesses. The old one, especially in its bankruptcy provisions, reveals that its precepts come from archaic reasoning where a trader was blamed for any failure, regardless of intention or contribution. The interest and protection of creditors was the primary and principal concern, making it by and large pro-creditor.

The new bankruptcy regime's main focus has moved from the liquidation of enterprises to the rescue of otherwise viable businesses and, increasingly, to financial restructuring.

Such improvements are to be commended. It is absurd that the country kept the same Commercial Code to govern economic activities under regimes that introduced radically different economic systems. The amendment, in its current form, should allow for a reflection of the free-market policies Ethiopia is increasingly flirting with.

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PUBLISHED ON Apr 03,2021 [ VOL 22 , NO 1092]

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