A welcome addition
Lebanon’s new Code of
Commerce signals the willingness
to improve the economy of the country, inspire confidence in the international community and boost foreign
investment. Carlo Pianese and Mohamad Al Rifai elaborate.
ver the last several months, the economic and financial landscape in Lebanon has reached a critical point, and as such, government
authorities have been active in taking measures aimed at helping the country recover from its state of recession. As part of this, the Lebanese Parliament enacted law No. 126 on March 7, 2019 (which came into force on July 1, 2019) (the New Law) which substantially amended the Lebanese Code of Commerce (the Code). The Code, enacted in 1942, had not been subject to such thorough review since 1968. The new
reforms have touched on many provisions of the Code, primarily focusing on reducing or outright abolishing obsolete formalities; encouraging better corporate governance; and introducing new investment instruments and new forms
of companies.
REDUCING FORMALITIES
The New Law introduced electronic means of filing corporate documents of companies and those of merchants. This reform comes as a result of the Lebanese government’s target to reduce the number of employees in
12 ISSUE 89 • NOVEMBER 2019
COUNTRY FOCUS / Lebanon
the public sector and to curb its spending. The corporate documents of a company and those of merchants will be accessible to the public through a database that will
be set up and maintained by the Ministry of Justice within two years of the publication of the New Law.
Companies will also no longer be required to physically file their records and corporate documents with the Ministry.
In this context, and in order to facilitate the filing of corporate documents of a company approving the audited accounts of a previous financial year, the New Law has exempted companies from obtaining
clearance from the National Social Security Fund, a practice which in many instances hindered the periodic filing of audited accounts. Additionally, the New Law has exempted joint stock companies (JSC)
from having an auditor appointed by the court of commerce except if requested by shareholders holding at least 10 per cent of the share capital of a JSC. Most of the aforementioned formalities were seen
as inefficient and long sought after to be eliminated by local companies.
ENCOURAGING BETTER CORPORATE GOVERNANCE
The directors of a JSC are no longer required to be appointed from within its shareholders. Such change is in line
with a major principle of sound corporate governance: i.e. the separation of ownership and management in a corporate structure. A major amendment brought by the New Law is the dissociation between the role
of chairman of the boar, and CEO of a JSC, which were previously combined roles under provisions of the old Code. Under the New Law however, the chairman of the board no longer has executive powers and such powers are now reserved for the CEO. Moreover, the chairman of the board must be appointed from amongst the board of directors’ members, whereas the CEO may be a non-board member.
The New Law also brought forth amendments aimed at reducing certain restrictions on foreigners: the board of directors is no longer required to have majority of its members comprise of Lebanese nationals; instead the new threshold has been set at one third of the board members, and the chairman of the board, if not residing in Lebanon, is no longer required to have a work permit
in Lebanon.
The New Law has also touched on a provision which used to raise serious concerns among foreign investors. Under the old provisions of the Code, a share held by a shareholder in a company for more than two years entitled its holder to a double vote at the shareholder meetings. The New Law has abolished such rights for any company that will be incorporated after the entry into force of the New Law,
whereas for companies incorporated before the entry into force of the New Law said provision may be abolished via unanimous resolution of the shareholders.
NEW INVESTMENT INSTRUMENTS
The New Law has introduced two new legal constructs not regulated under prior provisions of the Code: the preferential non-voting shares and the dissociation of proprietary rights in a share.
Preferential non-voting shares can be issued upon incorporation of a company or through a subsequent raise of share
COUNTRY FOCUS / Lebanon
The New Law introduced electronic means of filing corporate documents
of companies and those of merchants. This reform comes as a result of the Lebanese government’s target to reduce the number of employees in
the public sector and to curb its spending.”
capital resolved by an extraordinary general meeting of the shareholders provided that, at all times, preferential shares must not constitute more than 30 per cent of the share capital of the
company. A shareholder with preferential shares does not benefit from voting rights (except as specified below) and cannot be appointed as board member. The holder of preferential shares is entitled to receive dividends (non-cumulative or cumulative dividends, depending on the articles of
association of the company or the decision of the extraordinary general meeting which resolved on the issuance of such shares).
Unless otherwise specifically provided in the articles of association of the company or in the resolutions of the extraordinary general meeting of the shareholders which approved the issuance of the preferential shares, a holder of preferential shares is not entitled to receive any proceeds resulting from the liquidation of the company.
Holders of preferential shares enjoy voting rights with respect to (i) any matters which may affect their rights, privileges and preferences as holders of preferential shares; and (ii) in shareholders’ meetings
resolving on the change of the object or type of the company; share issuances to be paid in kind; or the dissolution of or merger of the company. The directors, the managers and the deputy managers of a company
are prohibited from owning any preferential shares, personally or through
affiliated parties.
The New Law has regulated the dissociation of proprietary rights in a share, a legal construct which was recognized under the provisions of the Lebanese
civil law but not specifically tailored for company’s shares. The New Law has set out the rights and obligations relating to the holder of usufruct rights and the holder of freehold rights relating to a share. The holder of usufruct rights will benefit from the right to receive dividends; and the right
to participate and vote in general meetings; whereas the holder of freehold rights will enjoy the right to receive the proceeds of a share in the instance of liquidation of the company or the repurchase of the share
by the company; the right to participate in extraordinary general meetings; the right to be appointed as board member; and pre-emption right in case of share capital increase or share transfer.
NEW FORMS OF COMPANIES
The New Law has regulated a long-awaited new form of company, i.e. the sole proprietorship limited liability company. Under the old provisions of the Code, a limited liability company needed to be incorporated by at least three shareholders. In practice, a person seeking to incorporate a limited liability company had to find two nominees to be registered shareholders. The New Law has eliminated this requirement allowing the incorporation of a sole shareholder entity without the need for a nominee set-up with all the insecurity it might cause. This new amendment comes after an earlier enactment passed by law No. 85 of November 18, 2018 which regulated the sole-proprietorship off-shore companies in Lebanon.
The Lebanese government is putting a lot of effort in producing a wave of public
finance, legal infrastructure and investor- friendly reforms. These changes and the
willingness to improve the economy of the country are expected to inspire confidence in the international community and foreign investors with the ultimate goal of placing Lebanon back on their radar and helping the country raise its status as an
emerging economy.
Text by:
- CARLO PIANESE, local partner, BonelliErede Dubai
- MOHAMAD AL RIFAI, associate, BonelliErede Beirut