Changes introduced- changes introduced by the new Commercial Code of Ethiopia

Overview of the changes introduced in the
revised Com. Code

 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.
 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.
 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
Why revision?

 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.
 Changes taking place in the rest of the world, especially
those occurring in investor countries necessitated to be
reflected in our code.
 Particularly, the need to be sufficiently reflect development in information, and
communication technology; recognition of new forms bos etc.
 The foreign commercial code based on which the code was
originally drafted had undergone many rounds of revisions
 The revision process has been there for quite a long time.
 The amendment is introduced at the time whereby the
Ethiopian government takes other initiatives aimed at
changing its overall legal environment.
Why revision? Explanatory Note

Structure of the Code
 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.
 The old Code contains:
 Book I Traders and Businesses Articles 1-209
 Book II Business Organizations Articles 210-560
 Book III Carriage and Insurance Articles 561-714
 Book IV Negotiable Instruments and Banking Transactions
Articles 715-967
 Book V Bankruptcy and Schemes of Arrangement Article 968-
1170
 Book VI Transitory Provisions Articles 1171-1182
Changes introduced

Structure of the Code
 Thus, the Code has been separated into commercial code
and financial services code. Thus,
 Book I (on traders), Book II (on business organizations) and Book V (on
bankruptcy) of the old code are now enacted as Commercial Code.
 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.
 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.
 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.
Changes introduced

 In relation to Business Organizations, the most important introduction is
the recognition of ‘One man Company’ and Limited Liability
Partnership.’
 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))
 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.
 (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)
 Consequently, one individual person is able to form a limited company,
the form which is form very suitable to sole proprietors.
BO

 Ordinary partnership is eliminated.
 There has always been confusion as to the
nature and purpose of an ordinary partnership
due its characterization as a non-commercial
business organization.
 No business has been organized in this form
making it meaningless to retain.
 Introduction of limited liability partnership (Art, 174,
221)
 The introduction of LLP has an important role in
facilitating to bring professionals together and thereby
enable them to join their professional expertise together
BO

 Regulation of group of companies: it acknowledges the structuring
option of setting up groups of companies including wholly owned
subsidiary. (Art. 550 ff, 601)
 It provides a definition for a Group, Subsidiary companies. See art. 550-
554 ff
 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,
 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.
 The Code defines control as the power to govern, alone or with
other shareholders, the financial and operating policies of a
subsidiary.
 A more nuanced definition is provided for branch company as well.
(Arts. 578, 108)
 Has recognized holding companies as traders (Arts. 9, 431), though they
BO

 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
 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.
 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.
 Book V Bankruptcy and Schemes of Arrangement Article
968-1170
BO

 Distinction as commercial and non-
commercial business organizations
abolished.
 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.
 The demise of this traditional difference
reveals itself in the move many nations
BO

 The introduction of supervisory board Art.
331
 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.
 Introduction of SB can be considered as a
move towards stakeholders approach.
BoD

 The permission of outside/non-shareholder directors Art.
296 (2).
 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 shareholder to be a
member of a Board of Director.
 The right of members of a PLC to form a Board as a
management body is clearly recognized (Art. 513)
 Attempted to separate executive and non-executive
directors. See art. 296 (1) (514 (2) for PLC).
BoD

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.

Minority….
 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.

Changes introduced- changes introduced by the new Commercial Code of Ethiopia

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Changes introduced- changes introduced by the new Commercial Code of Ethiopia