Lebanese Code of Commerce Reform
The absence of substantial reforms on the Lebanese Code of Commerce since its introduction in 1968 has had adverse consequences on the legal commercial landscape, its provisions becoming outdated, and sometimes obsolete. In order to break the legislative deadlock, Lebanon has introduced in 2019 its new Commercial Law No. 126 of 2019 (“The Law”), which delivers important amendments to the commercial practices. In the present article, we will address some major changes of the Law.
- Introduction of a new type of Limited Liability Company (“LLC”); the “LLC- Single partner”
The Law admitted the establishment in Lebanon of the “LLC- Single Partner” hereinafter SPLLC, a type of company that is well known in other jurisdictions like France. Nevertheless, the regime of SPLLC type as outlined in the Law differs from its regime in the French system.
In France, the limited liability company is governed by two different sets of rules, that apply to each company type. General rules apply to the multi-partner limited liability company, whereas another framework governs the SPLLC. Consequently, the applicability of either set of rules depends on the structure one intends to incorporate.
In Lebanon however, instead of issuing a distinct regulation that applies exclusively to the SPLLC, the Law integrated into the existing legal framework, new provisions related to such novel structure. All other provisions that used to apply to the standard LLCs, will continue to govern the SPLLC, as long as it does not contradict with the structure of the SPLLC. In doing so, the existing regulations have been adjusted to accommodate the nuances of the SPLLC. Therefore, the Law consists today of one unified set of rules that governs all types of Limited Liability Companies.
Furthermore, the Law enlarged the liability compass of a company’s manager, by incriminating the “misuse by the manager of corporate assets”. Therefore, the liability of the manager can be held for three major offenses: (i) falsification of financial statements, (ii) distribution of fictitious dividends, and (iii) misappropriation of corporate assets. [Article 253 et seq. of the Law].
- Changes to the Companies Merger’s and splits
The operations of mergers and splits were largely overlooked under the previous law. In fact, mergers and splits were superficially mentioned within the context of joint stock companies. This oversight prompted significant anticipation for the reform, which ultimately dedicated an entire chapter to these operations.
The Law now gives a clear definition to such operations. Article 210 of the Law defines a “merger” (اندماج) as being the process of consolidating multiple companies into a single entity. It also described the “split” (انشطار) as the transfer of a company’s assets to new entities or existing ones. Additionally, the Law introduces general provisions applicable to all companies under its Articles 210 to 213, followed by specific provisions for joint-stock companies and limited liability companies (LLC) under its Article 213.
In addition to these legal considerations, the reform also incentivizes mergers by exempting them from stamp, transfer, notarial, and registration fees. However, merging companies remains subject to Article 45 of the Income Tax Law, with a 5% reduction applicable to revalued real estate assets, that are not sold within the period of two years’ post-merger.
With such changes, we are no longer left in suspense regarding the destiny of companies undergoing mergers and splits transactions. It is worth mentioning that a long debate existed prior to the issuance of the Law, on whether the merged companies should be deemed dissolved and replaced by a new legal entity or if one of the merged company loses its legal personality and relies under the legal personality of the other one. A similar debate existed on split transactions. Nevertheless, the Law followed the prevailing doctrinal opinion by affirming that mergers and splits result in the dissolution of merged or split companies that will cease to exist, and their substitution by new entities, without the necessity of undergoing liquidation. Shareholders of dissolved companies become shareholders in benefiting companies as per the respective merger and split agreements.
- Introduction of Global Depositary receipts (“GDR”), as per Article 458 of the Law
Global Depositary Receipts, or GDRs are registered securities linked to the shares of a Lebanese joint-stock company. They are issued outside Lebanon by authorized entities, typically banks or financial institutions, and are traded on international regulated markets.
GDRs can be issued through agreements or company-issued letters and are limited to a maximum of 30% of the company’s share capital. Importantly, the underlying shares must be deposited and held with “MIDCLEAR”, a joint stock company held by the Lebanese Central Bank which sole purpose is to hold Bank registry, until the GDRs are either redeemed or converted into ordinary shares, or until the company that issued these underlying shares is dissolved.
The primary advantage of GDRs lies in the fact that it offers foreign investors access to Lebanese companies through regulated international markets.
- Major changes to Joint Stock Companies:
The reform has brought significant changes in relation to joint stock companies, manifesting in four key aspects:
- shares and shareholders’ rights:
- Division of share’s ownership right: The Law recognized the right to dismember share property rights, a noteworthy transformation in the law’s stance, evolving from a reserved demeanour to a confident and assertive position on the matter. Such right has been recognised under Article 116 of the Law followed by a comprehensive set of related provisions.
It is important to note that even though the dismembership of share property rights was not regulated in the previous commercial law, this practice was however longstanding and informally approved in practice, whether by the Lebanese jurisprudence and doctrine or by the Register of Commerce. As a matter of fact, it was very common for companies to divide the ownership of its shares between bare owners and usufruct owners and to register such changes before the Commercial Registry without any problems. Such habit was most commonly used for inheritance purpose.
Following the above, the Law has regulated the rights of the Bare Owner and Usufruct Owner in various areas such as for example but not limited to, capital increase (Article 205) and pre-emptive rights (Article 118), right to participate and vote in shareholder assembly (Article 116), etc.
- Preferred shares: The Law admitted the existence of “preferred shares”, a new category of shares within Lebanese joint Stock Company (“Lebanese SAL”), along with ordinary shares. It is worth mentioning that such class of shares was previously admitted only in companies exercising banking operations or banks.
- Double voting right: The double voting right is repealed under the Law. Previously, a shareholder was entitled to a double vote for each share it holds for more than two years. Today, shareholders in newly formed companies are not entitled to a double vote. However, existing companies have the deliberate choice to either keep such right or to abolish it by unanimous resolution of shareholders.
- Ultimate Beneficial Owner: Lebanese SALs, along with any other company type, shall disclose its ultimate beneficiary owner(s) “UBO” to the Commercial Registry. This obligation has been reaffirmed following to the decision No. 1472 of the Ministry of Finance dated 27 September 2018, that introduced the notion of UBO in Lebanon, and imposed several obligation of Lebanese companies related to this matter.
- Other changes related to shareholders: Shareholders can be represented in general assembly meetings by non-shareholders (Article 181). Also, they are allowed to participate in general assemblies through videoconferencing (Articles 156 and 181).
- Modern regulations concerning the board of directors and its members:
The reform introduces notable changes related to the management of the company.
- Article 147 of the Law allowed non-shareholders to be part of the board of directors of the company, and eliminates the requirement for board members to hold guarantee shares.
- According to Article 154 of the Law, an individual can be member in the board of directors of not more than eight companies, compared to six in the previous law, and is entitled to a 2 months’ grace period in case of breach. Failure to do so will result in its automatic resignation, and any decision made in his presence shall be void.
- Finally, Article 158, governing related parties’ transactions, has been revised to conform with contemporary practices. Now, the authorization for these transactions is granted by the board of directors and approved by the shareholder in a general assembly meeting.
- The separation of the role of chairman and general management:
The pivotal change introduced by the reform is the separation between the roles of the chairman and the general manager (GM) of the company, as stipulated in Article 153. Such division shall be clearly stated in the company’s bylaws.
Where the two positions are separated, the general manager will have an executive role within the company whereas the chairman will handle a non-executive role, related to the supervision of the company’s activities and management, as detailed in Article 157 of the Law.
As such, in case of separation of roles, the liability of the chairman becomes reduced to only the violation of the law or bylaws, without any liability for mismanagement (Article 167 of the Law).
In addition, according to Article 153 of the Law, the assistant general manager cannot be appointed as such if he is already elected as a member in the board of director.
- Changes related to “Auditor rules”:
Few articles applicable to auditors have been reinforced under the new Law.
In fact, according to Article 172 of the Law, an auditor cannot be appointed as such for more than five years in a row. This will ensure transparency between the company’s various bodies. In alignment with this objective, Article 177 of the Law now prohibits auditors from holding any financial interest in the company.
Furthermore, auditors’ responsibilities under Article 174 of the Law have been redefined to be more pragmatic. They are now tasked with auditing the final accounts prepared by the board of directors, whereas previously, the role of an auditor was limited to maintain a continuous control over the company’s operations.
Lastly, Article 173 of the Law abolishes the mandatory nomination of a complementary auditor in addition to the principal auditor. This remains a facultative appointment if deemed necessary by a company. However, this article does not apply to banks, that remain bound by the appointment of a principal and a complementary auditor.
Conclusion
While the Law is effectively integrated into the ongoing legislative movements in the region, particularly in Saudi Arabia and the United Arab Emirates, and despite its numerous advantages in commercial practices, the reform of the Law remains incomplete and necessitates additional enhancements to achieve sufficiency in the field.
Marlene Tayah
Junior Associate
11/11/2023
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DISCLAIMER: This blog post does not constitute legal advice, and no attorney-client relationship is formed by reading it. Additional facts or future developments may affect the content of this blog post. Before acting or relying upon any information within this newsletter, please seek the advice of an attorney.