Revised Commercial Code Brings Clarity on Capital But Leaves It Trapped

Apr 10 , 2026
By Yehualashet Tamiru

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The current administrative caution, while intended to prevent the artificial inflation of capital, may inadvertently discourage corporate transformation. The mismatch between a company’s accumulated assets and its formal capital creates a disincentive for firms to adopt more sophisticated structures like share companies. Instead of moving toward transparent, broader investment models, firms may be pushed toward "workarounds" or complex arrangements designed to imitate asset capitalisation, argued Yehualashet T. Tegegn yehualashet.t@ethioalliancelaw.com, a partner at Ethio Alliance Advocates LLP.

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The revised commercial Code offers a clearer and more orderly framework for how companies can raise and adjust capital, giving businesses more certainty in an area that had long suffered from ambiguity.

It expressly recognises two main ways to increase capital. Companies can issue new shares or raise the par value of existing shares, an approach that follows standard corporate law practice and provides companies with greater flexibility in financing growth. This clarity matters for companies seeking expansion, restructuring, or dealing with shareholder disputes.

The Code also appears to settle a question that had remained unclear under the old regime about what voting threshold is required when a company raises capital through the issuance of new shares. Previously, it was uncertain whether such a move demanded unanimous shareholder approval or whether a qualified majority would suffice. Authors of the revised Code seem to favour majority-based decision-making, undoubtedly an important step. It makes it easier for companies to act while still protecting minority shareholders under general corporate governance rules.

Beyond the procedure, the Code spells out four ways a company may increase capital by issuing new shares.

These are contributions in cash or in kind, the set-off of debts owed by the company, the capitalisation of reserves or other distributable funds, and the conversion of debentures into shares. Each is a common corporate finance practice and ties capital increases to clear and legally recognised sources of value.

Cash and in-kind contributions are the most direct methods, bringing new assets into the business. Debt set-off allows creditor claims to be turned into equity, reducing liabilities and strengthening the balance sheet. Capitalising reserves lets a company convert retained earnings into formal share capital. The conversion of debentures into shares offers another familiar tool, allowing a financing instrument that begins as debt to become equity under agreed conditions.

Yet for all that clarity, the Code leaves out a question with major practical consequences. It does not clearly say whether a company may use the value of its own existing assets as a basis for increasing capital. More specifically, it does not address whether a business may capitalise the appreciated value of assets it already holds, or otherwise transform that asset base into share capital without fitting the move into one of the listed methods. The silence creates a serious interpretive problem.

In practice, the common legal reading has been strict. The listed mechanisms are generally treated as exhaustive, meaning anything not expressly allowed is barred. Under this view, a company cannot directly capitalise its own assets, even when those assets have risen sharply in value over time. Lawyers and officeholders have therefore tended to treat such moves as impermissible.

Administrative practice has reinforced the narrow reading. Regulators, including the Ministry of Trade & Regional Integration (MoTRI), have generally taken a cautious approach, insisting on clear statutory authority for capital-related transactions. Without such authority, practitioners and public officials have been unwilling to approve methods that might be seen as bypassing the Code’s stated rules. The caution has a logic of its own. It promotes legal certainty and helps guard against abuse, including the artificial inflation of capital.

But it also narrows the options available to companies seeking legitimate restructuring.

The problem becomes especially apparent when a private limited company seeks to convert itself into a share company. The law usually requires such a move to meet minimum shareholder and capital thresholds. Consider a company formed as a private limited company by two shareholders with an initial capital of one million Birr. Over time, through successful operations and the reinvestment of profits, the business may build assets worth 200 million Br. Even so, its nominal capital may remain at the initial level unless it has been formally increased through one of the methods outlined here.

When those shareholders later decide to convert the private company limited by law into a share company, they should bring in additional shareholders to comply with the law. That is where the Code’s silence on asset capitalisation becomes more than a technical issue. If the accumulated assets cannot be capitalised before the conversion, the pricing of shares and the division of ownership become distorted.

The founding shareholders may see their stake diluted in a way that does not match what they actually built. They may have supplied the starting capital, carried the entrepreneurial risk, reinvested profits, and grown the company over many years. Yet new shareholders could enter a business with substantial underlying assets without contributing a proportionate amount. The law would fail to reflect the company’s real economic position.

The mismatch between economic reality and legal form creates a disincentive to corporate transformation. It undermines fairness in capital allocation and may discourage businesses from adopting structures better suited to expansion, including share companies that can attract broader investment. It may also push firms toward indirect or overly complex arrangements designed to imitate asset capitalisation. Such workarounds raise costs and deepen legal uncertainty.

At a basic level, the gap uncovers a broader policy tension between legal certainty and economic flexibility. Restricting capital increases to clearly defined methods can protect creditors, promote transparency, and preserve the integrity of stated capital. But a framework that is too rigid may not fit the realities of business growth, especially in an emerging market where companies can accumulate or appreciate assets without making parallel formal adjustments to capital.

A solution would likely require legislative or regulatory action. One option would be to allow the revaluation and capitalisation of assets, but only under tight safeguards, such as independent valuation, audit verification, and regulatory approval. That would offer flexibility while limiting abuse.

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PUBLISHED ON Apr 10,2026 [ VOL 27 , NO 1354]

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