Departure of New Commercial Code of Ethiopia on Formation of Share Companies

Lydia Kedir and Dagnachew Tesfaye
The new Commercial Code Proclamation 1243/2021 comes with some changes in the formation area of share companies. The new Commercial Code uses the same definition of the old Commercial Code(1960) on share companies: ‘A share company is a company whose capital is fixed in advance and divided into shares and whose liabilities are met only by the assets of the company.’ Hence we discuss here some of the departures of the new Commercial Code from its predecessor only in the formation stage of a share company.
Nominal value of Shares
The minimum capital of ETB 50,000(Fifty Thousand) for formation of a share company remains the same between the old and new Commercial Code. However the par value of each share, says the new Commercial Code, should not be less than ETB 100(hundred). In the old Commercial Code, the par value of shares used to be not less than 10(ten) Ethiopian dollars.
Distinction between Founders and Promoters
The old Commercial Code gives the name and status of a founder to any person, even though outside the company, who has initiated plans or facilitated the formation of the company. Now in the new Commercial Code a person( both artificial or natural) who initiates the formation of a company by public subscription, invites persons to join the company by preparing prospectus or in general acts with the view to realizing the formation of the company is called promoter. The new Commercial Code provides in detail what the liability of promoters are and special benefits allocated to promoters. Under the new Commercial Code, the name ‘founder’ is narrowed down to those individuals who establish a share company as between themselves without offering shares for public subscription. Article 252(2) of the new Commercial Code obliges the number of founders of a share company not to be less than five.
Redacting Article of Association
The old Commercial Code provides both memorandum of association and articles of association as formation documents of a share company. Whereas in the new Commercial Code, only memorandum of association is accepted as the formation document of the share company. Article of association is left out.
Valuation and Verification of Contribution in Kind
The old Commercial Code used to put a report of valuation of the in-kind contribution by a subscriber to be made by experts appointed by the Ministry of Commerce and Industry. Such valuation shall be verified within six month from the date of the formation of the company by directors and auditors. Now in the new Commercial Code, it is stated that the person who made the contribution in kind will provide an expert valuation report. The requirement of an appointed expert from the Ministry is left out. The verification process became a two step process. The promoters and formation auditor shall verify the valuation of contribution in kind first. This happens before the meeting of subscribers takes place. And then the board of directors and auditors shall verify the valuation in kind within six months from the date of registration of the company. Where the company under formation is not established by public subscription, the founders of the company shall verify the report of the expert. Similarly the second step of verification happens within six month from the date of registration of the company by the board of directors and auditors.
Signatories and Contents of Prospectus
Prospectus is a document prepared for serving the purpose of an offer for subscribers. The prospectus used to be signed by founders in the old Commercial Code. In the new Commercial Code, the prospectus is signed by all the promoters. The prospectus added few contents to the previous code. The prospectus will contain the anticipated time within which the formation of the company is to be completed and the company acquires legal personality. The law on Article 259(1)(g) second sentence of the new Commercial Code stipulates that under any circumstance, the time set for the compilation of the formation of the company shall not exceed five years. The prospectus should include bank details opened in the name of the company under formation in which payments are required to be deposited.
Auditing Requirement before Calling of Meeting of Subscribers
The old Commercial Code did not have the requirement of auditing before the meeting of subscribers. The meeting of subscribers will be called when the time for making an application for shares has expired. Now in the new Commercial Code, before the meeting of subscribers is called, the promoters are obliged to verify by an external auditor as to the fulfillment of the requirements of the formation of the company. The audit shall look into the fact that the promoters meet the requirement set by the law, full subscription of the capital of the company is made, contribution in kind is valued by experts and it is correct, deposit of cash collected from subscribers in the bank account opened in the name of the company is made and any other requirement set out by law or the memorandum of association of the company. Such an audit report shall be presented by the auditor to the meeting of subscribers for their approval.
Powers and Duties of Meeting of Subscribers
The new Commercial Code included as powers and duties of the meeting of subscribers the right to approve the reports of the promoters and formation auditors. The meeting will also determine the shares in the profits allocated to the promoters. In the old Commercial Code, the resolution of subscribers’ meetings was required to be signed by the founders. Now in the new Commercial Code, resolutions of subscribers’ meetings shall be drawn up and signed by all the promoters or founders and members of the board of directors that were elected at the meeting.
Who Registers the Company in the Commercial Register?
The old Commercial code was silent as to who goes to register the company at the commercial register. Now under Article 265(2) of the new Commercial Code, the registration of the company shall be effected by the promoters or as appropriate, the founders or any other person having a power of attorney form the promoters or founders.
Accompanying Documents for Registration in the Commercial Register
The new Commercial Code avoided the articles of association as an accompanying document for registration and included an audit report regarding valuation of contribution in kind and company formation. The rest of accompanying documents namely authenticated memorandum of association, prospectus where the company is formed by public subscription and resolution of meeting of subscribers will be submitted.
Action Period for Non-Compliance
The entry into the commercial register without complying fully, results in the endangerment of the interests of creditors or shareholders, the latter may request for dissolution of the company or any other appropriate measure from the court. Such a request has to be taken within three months from the date of registration in the commercial register, as per the old Commercial Code. Such a period of action for non-compliance is extended to one year by the new Commercial Code.
The departures in tasks and responsibilities, documents requirements and period of actions of the new Commercial Code from the old Commercial Code in the formation process of a share company contribute to clarity and easier implementation procedure. Many of the old Commercial Code concepts and ideas are still maintained, which shows that the old Commercial Code has proven effective in the formation stage of share companies throughout the test of time.

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Core Points on the State of Emergency

By Mahlet Mesganaw, lawyer and founder, DMLO

The government of Ethiopia has issued a State of Emergency Proclamation no 5/2021, effective as of November 2nd 2021 to last for six month. The scope of application is the whole country. The main purpose of the State of Emergency(SoE) is to avert the imminent threats against the existence of the nation which cannot be averted by regular law enforcement mechanisms posed by TPLF and its affiliates and outside forces. The HoPR on May 6,2021 has categorized TPLF and Oromo Liberation Army(OLA)-Shene as terrorist organizations. This brief article will cover core contents of the SoE Proclamation.

The Establishment of Command Post
The SoE has established a command post with a duty to execute the SoE Proclamation. The Command Post shall be spearheaded by the FDRE Head of the Defence Force and report to the Prime Minister. The Command Post shall have the power to issue directives to implement the SoE. Accordingly, till this date two directives were issued. The first directive Directive No 1/2021 is on the organizational structure of the Command Post. The second directive is Directive No 2/2021 is on the procedure of issuance and acquisition of temporary id cards.

Prohibited Acts
It is prohibited to disseminate information that empowers the terrorist groups, encourages the activities of the terrorist group or terrorizes civilian population. It is prohibited to render monetary, information, material or moral support, directly or indirectly to terrorist groups. Public gathering and demonstration without the permission of the Command Post or any other delegated authority is prohibited. It is prohibited to carry and move around firearms without permission. Residents are prohibited from moving around without carrying identity cards, passports or any other similar identity card. It is prohibited to disrupt the activities of any essential service or production sector or carry out acts of economic sabotage. Finally one of the prohibitions is against abuse of power. It is prohibited to engage in abuse of power with the intent to gain an illicit benefit under the pretext of enforcing the SoE Proclamation or detaining deliberately without reasonable suspension.

Non Derogable Rights and Use of Proportional Force
The Command post shall respect non-derogable rights listed under Article 93(4) of the FDRE Constitution during the enforcement of the SoE. Among the non-derogable rights the first one is Article 1 of the Constitution which embodies the nomenclature of the state i.e. The Federal Democratic Republic of Ethiopia. The second human right provision that is non-derogable right is prohibition against Inhuman Treatment indicated under Article 18 of the Constitution. Accordingly, everyone has the right to protection against cruel, inhuman or degrading treatment or punishment. No one shall be held in slavery or servitude. Trafficking in human beings for whatever purpose is prohibited. No one shall be required to perform forced or compulsory labour. The right to equality is the other non-derogable right. Article 25 of the Constitution declares that all persons are equal before the law and are entitled without any discrimination to the equal protection of the law. In this respect, the law shall guarantee to all persons equal and effective protection without discrimination on grounds of race, nation, nationality, or other social origin, colour, sex, language, religion, political or other opinion, property, birth or other status. Finally Article 39 of the Constitution i.e the Rights of Nations, Nationalities, and Peoples unconditional right to self determination, including the right to secession and the right to speak, to write and to develop its own language; to express, to develop and to promote its culture; and to preserve its history are non-derogable rights during the enforcement of the SoE.

The security forces can be ordered by the Command Post to use proportional force for the execution of the SoE measures provided in the Proclamation.

State of Emergency Measures
The State of Emergency measures include ordering the deployment of armed forces in any part of the country to maintain peace and security. The Command Post can order citizens whose age are fit for military service and who are in possession of firearms to take military training and take orders for military missions. In case those with firearms are unable to be deployed, they will be required to hand over their firearms. It can order curfew, closure of public transportation or any means of transportation. It can arrest without a court warrant upon reasonable suspicion and also search any person’s house, premise and vehicle upon reasonable suspicion that he/she cooperates with terrorist groups. It can order the closure of a given street or service giving institution for a certain period of time. It can give an order for persons to remain in a certain place or prohibit them from entering or evacuating from a given place for a certain period of time. It can partially or fully suspend local administrative structure and replace administrations with civilian or military administrations in parts of the country where there are serious security threats. The Command Post can order the regulatory authority to suspend or permanently cancel licences of civil society organizations, mass media or journalists which have been suspected of providing direct or indirect, moral or material support to terrorist organizations.

Suspended Laws
Without prejudice to diplomatic immunities enshrined under the Vienna Convention on Diplomatic Relations, substantive and procedural laws inconsistent with the SoE Proclamation remain suspended during the implementation of the Proclamation. In addition to that any judicial organ shall have no authority till the expiry of the enforcement of the SoE Proclamation.

Criminal Liability
Whoever violates the provisions of the SoE Proclamation or directives issued in accordance with the Proclamation shall be punished with simple imprisonment of upto 3 years or depending on the gravity of the offence rigorous imprisonment of up to ten years or if the violations entails grave punishment in other laws, such punishment shall apply. Even after the expiry of the SoE, violations of the SoE Proclamation and directives committed during the course of the SoE will cause criminal liability in accordance with ordinary criminal procedure rules.

The State of Emergency Proclamation has been issued to protect the sovereignty and territorial integrity of the country and its people. The severity of the threat is imminent and the government has to protect the well being of its people. Using the regular law enforcement mechanism will not avert the imminent threat posed against the existence of the nation. Given the gravity of the situation, every person needs to know and abide by each and every provision of the State of Emergency Proclamation and directives issued in accordance with the SoE Proclamation.

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Important Highlights on Federal Courts Civil Case Flow Management

By Luwam Chalachew, Legal Assistant at DMLO

The Federal Supreme Court has issued Federal Courts Civil Case Flow Management Directive No.008/2013 in accordance with powers vested in it by Proclamation No 1234/2021. The main objective of this Directive is to ensure citizens’ right to a fair trial within a reasonable period of time, equal access to justice and increase their assurance in the judiciary. And also in order to ensure accountability by creating efficient practice and effective judicial service by avoiding delay of justice. Scope of application of this Directive will be federal Supreme , High and First Instance Courts.
Public Hearing
According to Article 6 of the Directive, hearing should be public except in situations provided by law. This is in order to make the judicial system accountable and citizens will gain confidence in the courts by seeing judicial work in action.
Court Working Hours
Working hours for hearing will start 3:30 in the morning and 8:00 in the afternoon at local time. President of the court has the discretion to make working hours other than this taking into consideration the climate of the specific area as it is stipulated under Article 6(3).
Hearing Priority
Priority should be given to a case remanded for a review by appellate court or by cassation. Priority should also be given to elders, children, persons with disability, pregnant women and taking into consideration the public interest nature of the case.
Court Appointment Policy Procedure
In principle courts should make appointments in accordance with Civil Procedure Code and other relevant laws.
The sequence of making an appointment should take into consideration complexity of issues, time frame and the stage the case reached in accordance with Article 8 of the Directive. The court will give an appointment only where it is necessary to take some action. In determining length of the time the judge may take into consideration the specific nature of the case.
The date and time for appointment should be clearly specified to the parties. The date for court appointment should be respected. Alternative appointments may also be ordered upon fulfillment of conditions specified under Article 13 of the Directive.
Powers and Functions of Different Organs Regarding Case Flow Management
In order to secure efficient and effective judicial service without delay, follow up of cases will be made by the pertinent organs until a decision is made. The Directive provides for powers and function of different organs in order to make case flow management effective.
Powers and Functions of the Court President
The President follows up on enforcement of case flow management. The president will also conduct a research and verify the reasons for delay of justice and provide a solution. Generally, the President will organize to make convenient hearing organization and effective case flow management.
Powers and Functions of the Presiding Judge
The presiding judge will make administrative functions to make the judicial service accessible and convenient. The presiding judge will also make a follow up whether cases are being settled within the allotted time. Overall, the presiding judge will make an administrative function in order to serve justice without delay.
Powers and Functions of Judges
Judges have a mandate to ensure citizens’ right to a fair trial within a reasonable period of time. Specifically they will follow up on cases and work to settle cases within the allotted time. They may also take measures on cases that need correction. Judges have also the mandate to report about works of enforcement of this Directive. Thus judges have a mandate to provide effective and efficient court proceedings and judgment without delay.
Powers and Functions of Parties to a Proceeding
In order to enforce the Directive effectively, the powers and functions of parties to a proceeding are also specified under Article 18 of the Directive. Among the powers and functions of parties at issue are providing necessary documents, to refrain from intentionally causing delay by making unnecessary applications and to respect orders of the court.
Powers and Functions of the Court Registrar
Powers and functions of court registrar include opening files according to the Civil Procedure Code and submitting them to the court. Inform the parties of the time table of the case. Generally the Court Registrar has the mandate to facilitate the enforcement of the Directive.
Powers and Functions of Case Flow Management Director
The Directorate of case flow management has the mandate to follow up and take administrative measures on cases from the date of opening of that case until judgment is rendered. The Directorate also has a mandate to report enforcement to the concerned organ and facilitate implementation of the Directive.
Accountability and Responsibility of the Courts as an Institution
In general the courts have the mandate to take the necessary measures to settle cases within the time table provided by this Directive and to make the case flow management Directive accessible through publication and social media. To inform the society about cases which are settled and which are on progress. Generally to make the implementation of case flow management Directive efficient and effective. When necessary they will prepare manuals. The judicial organ will be held accountable if they fail to perform these functions according to Article 21 (2) of the Directive.
To sum up, the Case Flow Management Directive will have an important role in giving citizens due process of law. Citizens are complaining about the delay in the judicial system. So proper implementation of this Directive will ensure citizens’ right to a speedy and fair trial by avoiding delay of justice.

Conversion of Business Organizations under the Commercial Code of Ethiopia

By Luwam Chalachew, Legal Assistant at DMLO


Conversion is an operation by which the legal form of a business organization is changed without creating a new legal personality. Conversion doesn’t cause the creation of a new legal person rather it is considered a continuation of the original company. Conversion, as stipulated under Article 546(1) of the Commercial Code, only results in the amendment of Memorandum of Association.

Procedures to be Followed
The following procedures should be followed during the process of conversion:
1. The decision of conversion of one business organization into another may pass unanimously or by the majority required by the memorandum of association or by law as provided under Article 546(2).
2. The conversion has to be notified through publication in a newspaper having wide circulation and on the website of the business organization (if it has one).
3. The amended Memorandum of Association should be registered on the Commercial Register.

Effects of Conversion
Conversion doesn’t affect the continued existence of the original business organization; it doesn’t cause any interruption of activities. The effect of conversion starts from the date of registration in the Commercial Register. As per Article 548(1) of the Commercial Code, the rights and duties of the former organization shall pass automatically to the new business organization on the day of registration.

Rights and Liabilities of Members
Conversion neither increases any liability of members nor deprives rights of members. Notwithstanding these stipulations, members of Share Company or Private Limited Company who dissent from the decision on conversion may withdraw by selling their shares as per Article 547.

Rights of Creditors of the Former Company
Upon registration of the new business organization, creditors of the former firm shall be required to establish their claim forthwith, and shall be informed that, unless they object thereto, they shall be deemed to be creditors of the new business organization.
Approval of conversion shall be presumed where creditors have been informed of the decision of conversion by registered letter or an electronic means and have not expressly objected to it.
Creditors who make their objection to conversion shall be paid or provided with adequate guarantee. If the organization cannot pay, preemption rights shall be given to creditors regarding payments of profit out of the assets of the firm until all creditors have been paid.

Liability of Partners
The conversion of a firm shall not discharge partners with unlimited liability of their liability for undertakings entered into by the firm prior to the conversion, unless it is proven that the creditors have approved the conversion as per Article 549(1).
Where a share company, private limited company, or one person P.L.C is converted into partnership, the partners shall be free from personal liability for debts incurred by the organization before the conversion.

Generally conversion is a change in the form of a business organization. The mere change in the form of the business organization doesn’t deprive it of its legal personality nor does it confer a new legal personality on the new form of business organization. So it doesn’t affect the continued existence of the original business organization.

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