Ethiopia: Merger Under The New Commercial Code Of Ethiopia

The long-standing Commercial Code of Ethiopia first issued in 1952 was just recently replaced with a new Code in 2021. The new Commercial Code repealed Book I (Traders and Business), II (Business Organization) and III (Restructuring, Reorganization and Bankruptcy) of the previous Code. One of the major changes to the Code was the addition of a broader chapter governing mergers and divisions of business organizations. Previously, the Code provided only handful provisions on amalgamation (Article 549-554). On the new Code, merger of business organizations and its mechanics are addressed in greater detail under Title 10, Chapter 2 of Book III.

Types of Mergers

The Commercial Code defines merger of businesses as "... an operation whereby two or more organizations merge into one...". The law recognizes two modalities of merger: (1) merger by forming a new organization; and (2) merger by acquisition (Article 565). The law seems to envision direct mergers, whereby subsidiary entities are not necessarily required for the purposes of undertaking mergers.

A merger by forming a new organization requires the existing business organizations to wound up without liquidation and transfer all their assets and liabilities to an organization they form (Article 565 (2)). The shareholders of the business organizations that are wound up, in exchange, will receive shares in the new entity. The shares they receive from the newly established business organization will be proportional to what they are currently holding in each company (Article 575 (1)). Additional payments may be made in cash.

The second type of merger by acquisition requires one or more business organizations to wound up without liquidation and transfer all their assets and liabilities to a preexisting organization (Article 565 (3)). The shareholders of the company that is wound up will receive shares in the acquiring company. In such a merger type, one of the entities will have to wind up without liquidation and transfer its assets and liabilities to the other company. The shareholders of the company that is going to wound up will receive shares in the surviving entity. Additional payments may be made in cash.

Requirements for Merger

The new Commercial Code outlines the specific requirements for undertaking a merger transaction (Article 567-573.

• Merger Plan: Prior to the merger transaction, each of the participating entities must develop a merger plan, which must be signed by the entities' Board of Directors or General Managers. The Merger plan is an extensive document that details the economic rationale and the conditions of the merger, an approved consolidated financial report, details of transferred assets and liabilities, their asset valuation and how the valuation was done and other transaction related information.
• Merger Report and Merger Agreement: the Board of Directors or General Managers shall also draw up a detailed written report addressed to the general meeting of shareholders or members of the entities. This document contains the merger agreement as well. In addition, the report explains the economic rationale of the merger, the number and manner of in which shares allocated to the shareholders or member, details of cash payments to shareholders or members that disapproved the merger, whether any prior approval is required, any impact of the merger on employees and any other pertinent information.
• Impartial Expert Report: each of the participating entities must appoint its own independent and impartial expert to examine the merger plan, report and pertinent conditions of the merger. However, if all parties agree, a joint expert can be appointed. The expert will issue a written report to shareholders or members on whether the share exchange ratio and type of shares are fair and reasonable, as well as the method used to calculate the ratio, whether the proposed cash payments to shareholders or members who oppose the merger are appropriate, a declaration on whether creditors' interests are adequately protected, and whether a statement poses a risk to creditors' rights.
• Extraordinary Meetings: once the required documents and clearances are secured, the merger shall be approved by the general meeting of the entity and by a special meeting for those with preferred shares. The call for the general meeting should adhere to specific rules under the Commercial Code and the companies' respective constitutive documents.
• Publication: Once the merger is approved by the extraordinary general meetings, the merger plan shall be publicized in a newspaper that has nationwide circulation and posted on the websites of the entities. Furthermore, the notice should incorporate where and how the merger plan, report and the independent expert report can be found and a timeframe within which creditors can raise their objection.

Effects of Mergers

The effect of a merger transaction will be (Article 574):

• Both or one of the companies, depending on the type of merger, will cease to exist without liquidation.
• Their assets and liabilities will be transferred to the new business organization.
• Issuance of shares in exchange for their shares in the wound-up company.

Tax consequence: In general, a merger between two or more Ethiopian tax resident companies is considered a "reorganization" and therefore exempt from capital gains tax ("CGT") liability as long as the reorganization is not a scheme for tax avoidance. All merger transactions must be notified to the tax office, and a tax clearance must be obtained. It is worth noting that although mergers are CGT-exempt transactions, other types of taxes however apply when assets and liabilities are transferred between entities. These are mainly title transfer related tax and charges involving the transfer ordinary movables, special movables (including duty free and non-duty-free vehicles, machineries and equipment) and real properties (immovable properties).

Anti-trust and competition: The Competition Law provides a mandatory filing and pre-approval requirement regarding for any proposed merger transaction, if the aggregate capital, aggregate annual sale or aggregate property value of the parties involved in the transaction is above ETB 30,000,000 (which roughly amounts to USD 500,000 based on the prevailing exchange rate). Before the transaction can be finalized, the Ministry of Trade and Regional Integration must provide merger clearance, which may be withheld if the Ministry determines that the merger contains an anti-competitive element.

Employment: another consequence of the merger transaction worth noting is on employment relationships. For non-managerial employees, Article 16 of the Labour Proclamation No. 1156/2019 ("Labour Proclamation"), amalgamation (referring to merger) shall not result in modifying the employment contract, i.e. the contact cannot be terminated or modified without the consent of the employees. Employees should be transferred to the new merged entity. Liabilities arising from employment relations will also be transferred during the merger transaction. On the other hand, managerial employees are given protection under the 1960 Civil Code which provides that the contract of employment shall continue at the time of transfer of an undertaking. In general, a more favorable term may be agreed between employers and employees under employment contracts, policies, and collective agreements (for non-managerial employees).

Overall, the actual execution of a merger transaction is a lengthy and delicate process which has not been practically tested in depth. If you have any legal questions about merger transactions in Ethiopia, please contact Aman & Partners LLP.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.