This article critically analyzes the share company law provisions of the Ethiopian Commercial Code in light of the OECD (Organization for Economic Cooperation and Development) Principles of Corporate Governance. For convenience, it organizes and analyzes the share company law provisions corresponding with the structures of OECD Principles. The article identifies and demonstrates the loopholes and drawbacks of the share company law provisions that should be revisited and updated in light of the relevant OECD Principles of corporate governance.
1.1 Enhancing the Legal and Regulatory Framework
The OECD Principles urge government policy makers should craft their legal, regulatory and institutional bases that ensure the effective and efficient corporate governance framework. It should foster market integrity and create incentives to different market players. The principles suggested three prerequisites for effective corporate governance framework. First, it should integrate effective corporate laws, regulations and voluntary codes and standards. Second, it should avoid overregulation and regulatory vacuum, as well as be to cost effective, equitably enforceable to all market players. Third, it should be supplemented by clearly allocated regulatory and supervisory powers with robust implementing institutions.
Nonetheless, as noted, the legal frameworks of some share company law provisions apparently failed to create incentives to market players and also failed to encourage transparent and efficient markets. To demonstrate these, the provisions requiring minimum capitals and memberships for the formation of share companies are inappropriate and unnecessary. These requirements not only discourage new pools of resources and investments but also contravene international best practices. Currently, several countries have abolished minimum capital requirement for two reasons. First, it is blurred and confusing because capital requirements are prone to accounting manipulation. Second, such provision neither protects shareholders nor creditors in the first place. Similarly, minimum shareholding requirement has two shortcomings. On one hand, it creates obstacles to form new share companies by less than the legal limits. On the other hand, it compels incorporated companies to winding up by the fact that company’s shareholder memberships are less than the legal limits. However, in practice companies may have less than the legal limit shareholders but may have several wholly owned subsidiary companies. Therefore, compelling to wind up such companies by mere reason of the reduction of membership to the legal limits is clearly unfeasible to the modern realities of corporate structures.
Second, the share company provisions have loopholes in the requirements of initial offering of shares to the public. The requirements of the initial offering of shares to the public provided from articles 317-323 of the Commercial Code are defective and inadequate. First, the contents of the prospectus under article 318 do not require an audit opinions of the financial information incorporated in the prospectus. Second, there are no requirements for approval and registration of the draft prospectus by regulatory authority before issued and offered to the public. In addition, the offering of additional new shares in article 469(5) or debt securities provided in articles 429-433 of the commercial failed to require financial reports to be prepared based on established accounting and auditing standards and audited by independent auditor. It also neglected to clearly articulate the liabilities of founders/issuers where the offered prospectus to the public contained untrue or misleading statements or omitted the relevant information for investors’ investment decisions. All these legal and regulatory loopholes of the share company law provisions will have potential impacts on investors’ investment decisions. This in turn not only creates loss of investors’ confidence in the Ethiopian capital markets but also results in market inefficiency, raises the cost of capitals and inefficient use of scarce resources in the country.
Third, the share company law provisions are not supplemented by other legislation. Including security laws, regulations, and voluntary codes and listing standards. Only two sets of laws regulating banking and insurance companies exist. For this reason, there are no stock exchanges or alternative trading systems for trading of shares in the capital markets. Hence, in Ethiopia company shares can be only traded by direct dealings between the shareholders and investors or informal contacts between the company and investors. Therefore, the legal and regulatory frameworks should allow the establishments of organized stock exchanges and alternative trading systems by considering the country’s business culture. The establishment of stock markets will have crucial roles for the existence of strong capital markets in Ethiopia. They will serve as markets organizer (companies share liquidity), information distributors (between investors and issuers), standard setters (setting the listing standards for companies), regulators (regulating their members based on sated standards) and as business compotators.
