Over a year has passed since the 78-year-old Code of Commerce was finally amended by Law 126, adapting many of its articles to modern standards. However, instead of also ushering in long-awaited legislation that countless governments promised to deliver, their attempts to overhaul the archaic system fell short of any meaningful impact, the reform of the Code of Commerce not being enough to unlock the grants offered by CEDRE, nor to prepare for the impending economic apocalypse that was already looming ahead.
Table of Contents
I. A Reform Too Late
A. The Necessity to Modernize
1. Strengthening the Tech Startup Sector
2. Achieving the CEDRE’s Pledges
3. Implementing McKinsey’s Lebanon Economic Vision
B. The Lack of Further Reforms
1. Empty Promises
2. The Fabian Strategy
II. A Reform Nonetheless
A. Regarding Formalities
1. Electronic Integration
2. Regarding the Founders
3. Transparency
4. Exemption of the Quitus
B. Regarding Companies
1. Joint Liability of Commitments
2. The Transformation of a Company
3. Mergers and Demergers of a Company
4. Lebanese JSC (SAL)
5. Lebanese LLC (SARL) – Single Partner
C. Regarding the Rights of Shareholders
D. Regarding Bankruptcy and Responsibility
E. Global Depository Receipts
Bibliography
I. A Reform Too Late
As society evolves and progresses, so too must the legislation upon which it is bound and founded. Many reasons spur a country to modernize its laws, not least of which when economic and financial considerations are at stake. However, despite Law No. 126 reforming the Code of Commerce, the lack of following up with further changes and amendments in other domains of the law limited any meaningful effects the reform might have had with regards to its ultimate objectives: the unlocking of the desperately needed funds by the CEDRE Conference.
A. The Necessity to Modernize
The reform was introduced by Law No.126 of 29/03/2019 that modified certain provisions of the Lebanese Code of Commerce (Legislative-decree No. 304 of 24/12/1942). It was enacted to meet local and international standards.
1. Strengthening the Tech Startup Sector
With the revolution of information technology and the increasing use of electronic transactions, the Code of Commerce was unable to cope with these new realities, thereby presenting an unattractive outlook to foreign investors and hurting the startup sector.
As such, the central bank, Banque du Liban (BDL), issued Circular 331 in 2013 in a bid to encourage investment in the startup ecosystem, Lebanon’s rigid and non-adaptive laws necessitating a fresh update in order to help finance a potential tech hub in the Middle-Eastern region.
2. Achieving the CEDRE pledges
The Conference for Economic Development and Reform through Enterprises, or more colloquially referred to as CEDRE, held at Paris in April 2018, is the fourth time Lebanon attempts to muster international aid from different donors, most-exclusively consisting of various countries and international organizations such as the World Bank.
As a result of “Paris IV”, a host of nations pledged more than $11 billion in grants and soft loans to Lebanon, the funds being conditional upon Lebanon fighting corruption, reducing its budget deficit and adopting a series of structural reforms, among which is the reform of the Code of Commerce.
3. Implementing McKinsey’s Lebanon Economic Vision
Among the main reasons that gave way to reform is the Government-sanctioned report by international consulting company McKinsey’s Lebanon Economic Vision, which advocated for 11 statutes to be accelerated to provide a business-friendly environment, including the Code of Commerce. In fact, page 309 of the report states that Lebanon lags behind peers on ease of doing business. This “severely impacts the industrial sector (especially SMEs)”, which all the more confirms the importance of modernizing legislation (p.482).
B. The Lack of Further Reforms
While adapting the Code to modern and international standards is laudable, the lack of further changes regarding the promised structural reforms pledged by Lebanon was the final straw.
1. Empty Promises
One reform, however necessary, cannot make up for the need of countless others. As the McKinsey report stated and the conditions of CEDRE dictated, the access to the desperately needed funds are contingent upon structural reforms capable of overhauling the system while also managing the fiscal and corruption levels within the State.
Needless to say, such measures depend on the Lebanese politician’s goodwill that should translate not merely into words, but also into actions. Unfortunately, while logic and reason would have the bickering politicians united in the face of economic, financial and eventual social chaos of Lebanon during the COVID-19 era, they seem undeterred in maintaining a superficial attitude when negotiating with the IMF.
This is corroborated by former director at the World Bank Jamal Saghir, that despite the Lebanese government submitting a 53-page economic rescue plan to the IMF that won “praise for its erudition”, nevertheless, it “fell short on substance”. For example, a single paragraph1 in page 17 among the entire 53 pages was dedicated to address the electricity sector, which hemorrhages over $2 billion a year! In fact, “the plan is largely a government performance”, but he sees many question marks in Lebanon’s declared commitment to reform.
2. The Fabian Strategy
The Fabian strategy is a military strategy where pitched battles and frontal assaults are avoided in favor of wearing down an opponent through a war of attrition and indirection. Its employment implies that the side adopting it believes time is on its side, but it may also be adopted when no feasible alternative strategy can be devised. Unsurprisingly, when past mistakes caught up to the present Lebanese reality, this prompted the Government to finally admit the dreaded truth and begin the Economic Rescue Plan by infamously declaring that “the Lebanese economy is in free fall”.
Lebanon’s economic policies, or complete lack thereof, mainly consist of postponing the inevitable by borrowing money whether locally at absurd interest rates to banks or by emitting Eurobonds to investors. Time, however, was going to eventually run out for Lebanon’s delicately built house of cards that finally came crashing down at the beginning of this second decade. Many signs were foretelling, ever since the outbreak of the 2011 Syrian conflict.
On the one hand, Lebanon published virtually no credible macroeconomic data. On the other, the very nature of its economic model defies conventional analysis. According to an article, which summed the situation perfectly, Lebanon mysteriously maintained the illusion of “a stable currency, wondrous interest rates on Lebanese pound (LBP)-denominated deposits and dozens of profitable home-grown banks”, while running a sovereign debt valued at over 150% of GDP, “producing virtually no exports, enjoying hardly any foreign direct investment, managing government spending without a budget, and for years failing to agree on the basics of an economic policy”.
To put things into perspective, the following chart reflects the economic downturn and impending indicators of a looming crisis through the epic downfall of the number of newly registered companies in Lebanon, ranging from the peak of nearly 10 000 between 2009 and 2011, to a drastic decrease of less than half after 2014, reaching less than 3000 post 2019. This information should be coupled with the fact that the number of newly registered foreign companies in Lebanon over the last 6 years declined progressively from 44 in 2015, to 31 in 2018, finally culminating with 5 as of April 8th, 2020, according to the most recent government analysis.
In light of these statistics, among others as well, even if the Code’s newly modern articles provide a much friendlier and business-oriented model to attract foreign capital, its implementation in March 2019 could not have accomplished any realistic short-term goals, whether it was stimulating the economy through foreign investments or local markets, or unlocking the $11 billion within CEDRE and, incidentally, the estimated $5 billion through the IMF.
II. A Reform Nonetheless
Despite its shortcomings, Law No. 126 that amended the Code of Commerce introduced new legal concepts that reform commercial acts in Lebanon. It opens up the local market to a global one by encouraging foreign investments and by integrating several amendments made to adapt to the changed business environment in Lebanon and globally.
The following paragraphs shall summarize the chief modifications that were integrated into the Code.
A. Regarding Formalities
One of the fundamental aspects the reforms tackled was the formalities from within and without companies.
1. Electronic Integration
As such, Law No. 126 gives the possibility to the members of the board of directors to use electronic means within the framework of the transactions of deposit and registration of the company before the Trade Register according to a mechanism to be determined by the Minister of Justice. This innovation aims to facilitate the incorporation of companies in the Trade Register. Additionally, the legislator removed the obligation to register the LLC’s by-laws at the notary located at the company’s headquarters, instead of rendering it possible with any notary.
2. Regarding the Founders
This law also allows the founders of a company to recover the amounts deposited in a bank account (which represents their subscription to the capital of the company), in case the company is not established within six months the date of signature of the articles of association of the company with the notary.
3. Transparency
The reform also puts at the expense of the members of the board of directors an obligation which is to publish before the trade register or by an electronic way, in the context of transparency, the obligatory declarations and periodical reports after the General Meeting approves the annual accounts of the fiscal year.
4. Exemption of the Quitus
Moreover, this law also innovates by exempting a company to obtain the quitus or discharge issued by the National Social Security Fund for the completion of any deposit or formality in connection with the yearly reports and Ordinary General Meeting adopting the accounts. This was implemented in order to facilitate the access of third parties’ information relating to the financial situation of the company.
B. Regarding Companies
1. Joint Liability of Companies
Are jointly liable not only the company founders but also every person for commitments entered into and for expenses made towards the formation of the company, without recourse against subscribers for shares in the event the company failed to be formed. The reform thereby took into account the case laws and doctrines by extending the joint responsibility.
2. The Transformation of a Company
The reform also confirms the court’s tendency aiming to consider that the transformation of the form of a company does not entail the extinction of its moral personality and the emergence of a new one.
3. Mergers and Demergers of a Company
The law adopted regulations regarding mergers and demergers of a company, explaining the mechanisms behind them and also providing fiscal alleviations.
4. Lebanese JSC (SAL)
With regards to the joint stock company (JSC), the law undertakes several procedural modifications, especially at the board and managerial level.
For example, the law requires that one-third instead of two-thirds of board members be Lebanese, in an attempt to render the JSC business friendlier and attractive to foreign capital. The reform also allows the Chairman-General Manager to be a foreign national (thereby exempting him to get work permit) and this role can only be performed in six companies. As for the cumulating of the directors’ mandate, it has been modified from six to eight
Most importantly, the law separates between the roles of General Director and the Chairperson of the Board of Directors, in order to ensure that each role’s responsibilities within the company are clearly defined. This also aligns with the principles of better corporate governance.
Furthermore, the Code no longer prohibits a person over 70 years old to be a director of more than two companies.
Moreover, the mandate of the Principal Auditor may no longer be renewed for more than five years. Finally, the law admitted the separation between shareholders and board members since the latter may not be shareholders (the qualifying shares having been canceled).
5. Lebanese LLC (SARL) – Single Partner
Among the more innovative provisions, the amendments extended the concept of Limited Liability Company (LLC) by allowing a physical person to incorporate a one-person (Single Partner) LLC, bearing losses up to the amount of their contributions.
C. Regarding the Rights of Shareholders
Just as the mechanism of repartition between bare ownership and the usufruct exists in property rights, the legislator has also officially established and recognized the same mechanism in the shares by distributing the rights relating to each of the bare owner and the usufructuary.
Therefore, and without prejudice to cases of delegation and representation between bare owner and usufructuary or mutually consented repartition adopted by virtue of side written agreements notified to the Company, the attendance and vote in the Ordinary General Meetings belong to the beneficiary of the usufruct of the share; and the votes in the Extraordinary General Meeting belong to the owner of the share (bare owner).
In addition, the legislator finally adopted the regulation of preferred shares.
D. Regarding Bankruptcy and Responsibility
The legislator introduced protections for the estate of the spouse of the bankrupt, in order to promote equality between men and women. Additionally, he broadened the circle of responsibility of persons in the event of bankruptcy of the company, namely the members of the Board of Directors and the General Manager, and any other person responsible for the management or control of the company, including the auditor. This established a presumption of guilt and the Directors cannot release themselves from their responsibility unless they prove that they acted as diligent and active professionals.
E. Global Depository Receipts
Global depository receipts or GDRs are financial instruments through which companies from emerging markets choose to raise capital. Pursuant to the Financial Times glossary, they are defined as “negotiable shares issued by depositary banks that represent ownership of a specific number of shares in a company and can be traded independently from the underlying shares”.
The legislator integrated such financial instruments in order to adapt the Code with the market evolutions, allowing foreign firms to have their stock trade in the domestic market by removing several steps, as well as to ease domestic investor purchases of foreign securities.
As these amendments constitute a right step towards the direction of stability, growth, and a modernized business law that attracts foreign investors, they are not enough to tackle their true purpose: overhauling the politically-stricken and economically-deprived system. In order to achieve true change, similar reforms must be enacted in other domains and sectors.
Written in collaboration with Jack Khamo.
Bibliography
“IMF Assistance a ‘Bitter Pill’ to Swallow.” The Daily Star Newspaper – Lebanon, 26 May
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Liban, Banque du. “https://www.bdl.gov.lb/circulars/download/477/en.” 22 August 2013. https://www.bdl.gov.lb/.
“Abracada…broke.” Synaps.network, www.synaps.network/post/lebanon-economy-crisis.
“Grand Theft Lebanon.” Synaps.network, www.synaps.network/post/lebanon-finance-economy-ponzi-bankrupt.
- Page 17 Section D, 1, a.:
“Electricity sector reform: budgetary transfers to EdL amounted to US$1.5 billion in 2019, equivalent to 2.9% of GDP thus representing a heavy burden on the budget
The government plans to eliminate EDL subsidies as soon as the EDL plan approved in April 2019 is implemented and electricity is provided 24/24 hours per day. Tariff will increase gradually with the generation. The government will continue to implement the measures aiming at improving efficiency, expanding capacity, and reducing waste and theft”