Canada: A Brief Overview Of The New Limited Liability Company Structure To Be Introduced In The DRC By The OHADA Uniform Act Relating To Commercial Companies

Last Updated: August 20 2012
Article by Ali Boroumand

On February 11, 2010, the Democratic Republic of Congo (the "DRC") enacted a new law pursuant to which it will join the Organization for Harmonization of Business Law in Africa ("OHADA") which was established by the Treaty executed in Port-Louis on October 17, 1993.

The DRC finally filed the with the depository of the OHADA treaty (Government of Senegal) on July 12, 2012 the instrument of accession and the OHADA uniform acts, including in particular the Uniform Act relating to Commercial Companies and Economic Interest Group established by the OHADA (the "Uniform Act"). The Uniform Act will become applicable in DRC as of September 13, 2012.

A POSITIVE IMPACT ON FOREIGN INVESTMENT

The implementation of the Uniform Act will have a positive impact on investment in the DRC by modernizing the obsolete corporate legislation currently in force in the DRC., in particular by doing away with the limited liability company (société À responsabilitélimitée, the "SARL") promulgated by a royal order of June 22, 1926 which contained only very succinct (not to say inexistent) rules and granted significant intrusive powers to the government.

This new set of detailed rules applicable to business companies will bring about the long awaited alignment of DRC law with current business and financial needs, and will serve to simplify the operations of joint ventures established in the DRC. The Uniform Act will also have an impact on other areas of business, such as the field of accounting, with the implementation of the Uniform Act Organizing and Harmonizing Undertakings' Accounting Systems meant to enhance financial transparency and improve financial risk management.

HARMONIZATION FOR EXISTING COMPANIES TO BE COMPLETED WITHIN TWO YEARS OF THE IMPLEMENTATION OF THE UNIFORM ACT

Existing companies subject to the Uniform Act are required to harmonize their articles of association with the provisions of the Uniform Act within a period of two years following its coming into force (during which time existing articles of association will remain in effect). Harmonization may be effected by way of amendment of the existing articles of association or the adoption of new articles of association. In the event of failure to comply with the required harmonization, the provisions of articles which are contrary to the provisions of the Uniform Act will be deemed to be void.

SEVEN TYPES OF BUSINESS COMPANIES

The Uniform Act provides for seven different types of corporate structures:

  • two types of legal entities with unlimited liability (société en nom collectif and société en commandite simple);
  • two types of limited liability companies (société À responsabilité limitée and société anonyme);
  • two types of partnerships (société en participation and société de fait); and
  • the economic interest group (groupement d'intérêt Économique).

While companies with unlimited liability, partnerships and economic interest groups represent a welcome addition in certain circumstances, limited liability companies (société À responsabilitélimitée and société anonyme) are very likely to become the most common types of companies used in the DRC by foreign investors.

The société à responsabilitélimitée under the Uniform Act is substantially similar to the existing société à responsabilité limitée and société anonyme (SPRL). The société à responsabilitélimitée is particularly appropriate for closely-held corporations with a simplified management structure1.

The major innovation of the Uniform Act for the DRC is the creation of the société anonyme (the "SA") which will replace the soon to be defunct SARL.

A. GENERAL FEATURES OF THE SA

A SA is essentially a stock corporation in which the shareholders' liability for the debts of the company is limited to the amount of their equity contributions. Shareholder rights are represented by shares.

A new introduction into DRC law is the possibility for a SA to have only a single shareholder. This will enable corporate groups to set up wholly-owned subsidiaries in the DRC without having to use â€Üshadow' shareholders to comply with the seven-shareholder requirement applicable to SARLs. Under the Uniform Act, the share capital must be equal to at least 10 million CFA francs (equivalent to US$22,883) divided into shares with a minimum par value of 10,000 CFA francs each (such amounts may be adjusted depending on the prevailing exchange rate at the time of conversion into local currency).

A feature which may well be decisive when considering the SA corporate structure may be that it may publicly offer securities.

B. AN OPTIONAL MANAGEMENT STRUCTURE

As the law applicable to SARLs was silent on the organization of management, investors were required to draft lengthy and complex provisions in the articles of association to organize the management bodies of the SARL.

Under the new law, shareholders will have the option to choose between the two principal management structures, i.e.:

  • Administration by a board of directors vested with the widest powers and authority to act in all circumstances on behalf of the company, within the limits of the corporate purpose and subject to the powers conferred upon the shareholders' meeting. This board of directors' structure applicable to SAs with at least two shareholders may be of particular interest for joint venture companies. The board of directors must be composed of three to twelve members (with no more than a third of its members being non-shareholders of the company), appointed by the ordinary shareholders' meeting.

Under the board of directors scheme, management powers are entrusted to either: (i) a dual structure with a chief executive officer and a separate chairman of the board of directors (non-executive position), or (ii) a single chairman and chief executive officer, discharging both duties. Under both structures, such officers and chairman are appointed by the board of directors.

  • Administration by a managing director: this simplified option is reserved for SAs with less than three shareholders and which do not publicly offer their securities. The managing director is appointed by the ordinary shareholders' meeting and assumes the responsibilities otherwise vested in the board of directors and the chief executive officer under the board of directors structure explained above.

It is worth mentioning that the Uniform Act also provides certain limitations on the number of offices directors or officers may hold simultaneously in the DRC2. These new limitations, which do not exist under the current legislation, are intended to enable directors and officers to devote more time to the exercise of their duties and to improve corporate governance standards.

The Uniform Act is, however, silent on whether meetings of the board of directors may be held via video-conference or teleconference. Commentators tend to agree that the articles of association may provide for this option.

C. SHAREHOLDERS' MEETINGS

The Uniform Act provides very detailed rules governing the convening, the majority and quorum requirements and the powers of shareholder meetings. As for the organization of the management, this set of default rules eases the establishment of SAs by not requiring detailed and extensive articles of association.

  • The ordinary shareholders' meeting makes all decisions which are not reserved to the extraordinary shareholders' meeting including, among others, approval of the financial statements, allocation of income, distribution of dividends, appointment of the directors or the managing director. Decisions must be approved by a simple majority of the votes. The quorum at the meeting initially called is met if shareholders holding at least one-quarter of the shares of the company are present or represented. There is no quorum requirement at a reconvened meeting.
  • The extraordinary shareholders' meeting is empowered to amend any provision of the articles of association and to approve transactions affecting the structure of the company, such as a merger, spin-off, conversion, winding-up, etc3. Decisions must be approved by a two-third majority of the votes and are not subject to the approval of the executive power as is the case under DRC law applicable to SARLs. The quorum is met if shareholders holding at least one-half of the shares of the company are present or represented at the meeting initially called and one-quarter at a reconvened meeting. There is no quorum requirement at a further reconvened meeting.
  • The Uniform Act provides interesting safeguards in the context of shareholders' meetings by defining the abusive exercise of minority rights or majority rights. Shareholders' decisions may be impugned by minority shareholders and majority shareholders may be held liable if the latter made a decision serving their sole interests (i.e. contrary to the interests of the minority shareholders and which may not be justified in terms of the company's interest). The abusive exercise of minority rights is defined and minority shareholders may be held liable if the minority shareholders, without a legitimate reason, veto decisions which are necessary for the interests of the company. Although Congolese Courts can refer to the doctrine of abuse by shareholders of their majority or minority interest (by reference to Belgian and French law), having such safeguards expressly set out in DRC law will provide for a greater degree of legal security for foreign investors.
  • One innovative addition of the Uniform Act which strengthens shareholders' participation is the entitlement of the shareholder of a SA to propose a draft resolution to a shareholders' meeting. This entitlement is subject to certain shareholding thresholds: between 0.5% and 5% depending on the size of the share capital. Other provisions which do not currently exist for the SARL under DRC law include information rights for the benefit of the shareholders (auditors' or management reports, list of shareholders, financial statements, inventory, etc.).

D. SHARES

  • As may issue various classes of shares entitling their shareholders to preferred rights to the profits or to the liquidation proceeds. The articles of association may also provide for double voting rights conferred upon shares registered for at least two years in the name of the same shareholder. This new privilege may be of great interest for local joint venture companies.
  • Shares are freely negotiable. The articles of association may, however, subject the transfer of shares to a third party to the prior approval of the board of directors or the ordinary shareholders' meeting.

E. CONTROL OF THE SA

Several provisions of the Uniform Act will undoubtedly reinforce shareholders' control over management.

  • One significant addition in the Uniform Act is the control over the related-party transaction. Any agreement between a SA and any of its directors, chief executive officer or deputy executive officer, whether directly or indirectly (through a third party) must be subject to the prior approval of the board of directors and must be subsequently ratified, at the end of each fiscal year, by the ordinary shareholders' meeting4. Similar provisions apply to the managing director.
  • Related-party transactions which have not been approved by the board of directors may be declared null and void provided they have had adverse consequences for the company. However, this procedure does not apply to related-party agreements entered into at arm's length and to transactions routinely carried out by the company as part of its activities.
  • In addition, the Uniform Act prohibits SAs from granting loans or current account overdrafts, to directors, officers, general managers and assistant general managers (as well as their respective relatives) and from providing them with security or a guarantee for their commitments vis-À-vis third parties.
  • SAs must also appoint one or more statutory auditors for a six-year term, which auditors cannot be removed prior to the expiry of such term. In order to ensure a proper and independent monitoring of companies, the Uniform Act clearly sets out the tasks, duties, rights and liabilities of statutory auditors.

F. OTHER NOTEWORTHY PROVISIONS

The Uniform Act provides for other new provisions which do not exist under the current legislation applicable to SARLs. Noteworthy provisions include:

  • A financial assistance rule under which a company may not grant advances or loans or otherwise provide security for the subscription or purchase of its own shares by a third party;
  • A complete and detailed set of rules governing the merger of two SAs or the spin-off of a SA. Such rules list the approval process, the preparation of various reports and the legal effects of such merger or spin-off;
  • Aside from shares, SAs can issue various sorts of securities, namely bonds5 (including convertible bonds or bonds reimbursable in shares) or other complex securities (subscription or acquisition rights, etc.). The Uniform Act sets forth the conditions for the issuance of bonds , and the rights and obligations attached to such bonds (e.g., representation of the bondholders). This new power will certainly facilitate the implementation of financing solutions for SAs.

Footnotes

1 The société à responsabilitélimitée is run by one or several managers vested with the widest powers to act under all circumstances on behalf of the company, subject to the powers delegated to the shareholders' meeting under the Uniform Act.

2 For example, a natural person who is a director in his own name or as representative of a corporation may not be a member of more than five boards of directors of companies having the registered office in the same state, or no person may hold more than three offices as chairman and/or chief executive officer of SAs having their registered office in the same state.

3 Any increase in the commitments of the shareholders above their contributions requires the consent of all the shareholders.

4 The same approval process is applicable to agreements between a SA and another corporation in which one of the directors, the chief executive officer or a deputy executive officer is also an owner of such corporation, or a partner with unlimited liability, a manager, director, deputy managing director, chief executive officer or deputy executive officer in such contracting corporation.

5 Provided the SA has been in existence for at least two years.

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.

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