Capital Ethiopia Newspaper

Legal Perspective: Ethiopian Shareholders; locked in and locked out?

“Shareholders are stupid because they buy shares, and impertinent, because they demand a return,” Carl Fuerstenberg (1850-1933). This was an old view towards share companies held by some writers scores of years ago. It is undisputed that share companies play a significant role in today’s economic world. A share company is a form of business organization where, in most instances, a large group of people invest cash or in-kind contributions in a company (administered by strangers) in return for units of ownership representing a proportion of the company’s capital (shares). Any rational person would question why an individual would invest his money in a Company managed by strangers (who may or as often is the case, may not be professional businessmen)? Yet, individuals that buy shares expect high level profit from the Company in the form of dividends and share re-sale premiums.
There is a very fashionable development highly prevalent in our capital these days. Today one will not be alarmed while hearing a TV or radio advertisement inviting the public to scramble and buy shares in a certain share company that would soon be launched. Many individuals are purchasing shares in Companies, following jaw-dropping advertisements that promise prospective shareholders a huge immediate return. Some even manage to tell us how much percentage we would get annually with a great degree of certainty when the Company is not even operational. We wonder, have our share companies made the long awaited breakthrough that would boost our economy? Are they to be the next Google or Facebook? Or have they started conducting a highly professional, peer reviewed, and reliable business feasibility studies allowing them to make such daring predictions corroborating their advertisements? Ambition is one thing that we all aspire; but members of the public need to have a clear picture of what they are getting themselves into before they give away their valuable money expecting large returns. 
And given the generally applicable regulatory framework, we ponder whether the majority of individuals buying shares in Share Companies are prudent investors dedicating their capital in bigger undertakings, or whether they are simply impertinent? The 1960 Commercial Code sets out the substantive legal framework regulating Share Companies, and the rights and duties of shareholders under Ethiopian law. We wish to emphasize now on few legal and business aspects in an Ethiopian context which an average shareholder needs to be aware of prior or in the course of investing his/her money. In doing so, we will try to keep this as less legalistic as possible and limit our discussion to only few among many critical issues facing shareholders in Ethiopian. 
A Share Company has its own legal personality and is comprised of a minimum of 5 shareholders, with no restriction on the maximum number of participants. Though our law allows for both public and private share companies, we limit our discussion on publicly held share companies given the legal and institutional challenges relatively associated with it. The Ethiopian legal system envisions a dual treatment to share companies accounting for the type of business being undertaken. The recent Banking Business Proclamation No. 592/2008 and the Consolidated Banking Directives of the Ethiopian National Bank No. SIB/1/1994 provides that banks are to be treated differently than other share companies. This is presumably to preserve the interest of the public by assuring financial soundness and restricting substantive control by individual shareholders.
While this is good and sound, unfortunately, share companies other than banks are still governed by a law which is more than half a century old. And there are good numbers of problems that are associated with the implementation of the law as it now stands. Ambiguities as to who founders and/or promoters of a company are, distinction between requirement for formation and capital increase, elements of a prospectus, supervision mechanisms, disclosure requirements, accounting and auditing standards, duties of directors, managers liability, shareholder intervention, institutional investors, proxy voting, takeovers, mergers and acquisitions, chain of companies, corporate veils, shareholder activism, capital markets, and dissolution & liquidation processes are some of the areas that are ill-addressed by our aged Commercial Code. Furthermore; how much knowledge does the average shareholder possess about the share market? Is he/she aware of what his/her company is doing? Does he/she know what the current value of his/her share is? How is his/her company performing? Has he/she ever seen the company’s balance sheet? When and what amount of dividend should he/she expect? What would he/she do if the investment does not meet his/her expectations? Who is to be blamed and where should he/she go and get recourse from? Our share companies are backed by weak legal and regulatory instruments, monitored through inadequate internal and external control mechanisms and surface in an environment with unpredictable product market competition. We will try to pick out some of the issues mentioned above and give detailed legal and business insights in future publications. 
As mentioned above, most advertisements are so tempting to pass with all those future money returns parading into our pockets. However, we have not yet come across one informing the public of the potential returns of their investments with the probable risks associated. None indicate the volatility of the nature of share markets. We acknowledge the fact that few share companies perform significantly and their shares have high demand. But unlike most other countries where companies are held privately and later issue shares through initial public offerings (IPOs), majority of share companies issue shares at the birth of the company where their products or services are not tested.
A peculiar nature of shares is their liquidity. Shares are instruments that can be easily traded and converted into cash. Rather than being an instrument frequently traded in the market, Ethiopian shares are mostly locked in the drawers praying for dividends which may or may not come and later inherited to heirs if the company does not die earlier than the owner of the share. Where, to whom and at what price would a shareholder sell his shares? Some possibilities of disposing shares exist under the law, but though luck in their implementation.
One can always say an individual entering a business judgment through his free will should be aware of the risks involved, and there should not be a “God Father” overlooking and safeguarding his interest. We beg to differ; the present understanding of share companies in a global scale acknowledges the importance of such business structure for a nation’s economy. We believe that share companies could be a strong arm of our economy if properly regulated in order to protect the interests and confidence of all stakeholders involved. Today, an Ethiopian shareholder, who invests his/her money bluntly and unadvised, can neither influence management nor exit, is locked in and locked out. Building the habit of making calculated business judgment by assessing the legal consequences better serves the interest of shareholders. This opinion does not establish any sort of client-attorney relationship with readers. Good Day!
Bahakal Abate Yimer (LLM, LLM, LLB)
Micael Sehul Micael (MLB, LLM, LLB)