Emerging Separation of Ownership and Control in Ethiopian Share Companies: Legal and Policy Implications

Author:Fekadu Petros Gebremeskel
Position:LL.B, LL.M (AAU); former Arbitration Tribunal Manager at ECX
Pages:1-30
SUMMARY

Ownership and control are often concurring attributes in the ordinary situation of property ownership. In the context of publicly held companies, a phenomenon occurs whereby the persons who own the company are precluded from controlling it. The reason for this is that as the number of shareholders rises, control is delegated to managers, and shareholders are limited to ineffective control via... (see full summary)

 
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EMERGING SEPARATION OF OWNERSHIP AND
CONTROL IN ETHIOPIAN SHARE COMPANIES:
LEGAL AND POLICY IMPLICATIONS
Fekadu Petros Gebremeskel
Abstract
Ownership and control are often concurring attributes in the ordinary situation
of property ownership. In the context of publicly held companies, a
phenomenon occurs whereby the persons who own the company are precluded
from controlling it. The reason for this is that as the number of shareholders
rises, control is delegated to managers, and shareholders are limited to
ineffective control via shareholder general meetings. This article posits that the
separation between ownership and control is growing in Ethiopia, and submits
some empirical evidence in support of this claim. Relying on the data and
literature on corporate governance, the article attempts to show the deficiency
of the Commercial Code in protecting the rights of minority shareholders in the
context of such publicly held companies.
Key words:
Corporate governance, corporate control, minority shareholder rights,
ownership & control, share companies
Abbreviations
OECD Organization for Economic Co-operation and Development
IPO Initial public offering
LLSV Raphael La-Porta, Florencio Lopez-de-Silanes Andrei Shleifer, and
Robert W. Vishny
LL.B, LL.M (AAU); former Arbitration Tribunal Manager at ECX; currently studies
International Dispute Settlement at Geneva University Graduate Institute for
International & Development Studies. The writer thanks Ato Tadesse Melaku, Ato
Elias Nour and the article’s external assessors (who remain anonymous). The article
has greatly benefited from their comments. The writer also thanks MoTI (Ministry of
Trade & Industry) staff for their cooperation in availing access to the Ministry’s
archives, and Ato Helaway Tadesse, Sr. V. President of Zemen Bank S.C, for
promptly providing him with the data that was necessary for this article. For any
questions or comments with regard to this work, the writer is glad to be contacted
through: fekaduros@yahoo.com
2 MIZAN LAW REVIEW Vol. 4 No.1, March 2010
Introduction
The share company is one of the forms of business organizations recognized
under the Ethiopian Commercial Code. It is established through the issuance of
shares to an unlimited number of members as provided for by Articles 304-509
of the Commercial Code. The result of public subscription toward the formation
of a share company is often accumulation of huge capital from thousands of
shareholders.
Publicly held share companies give rise to a host of complex corporate
governance issues. On the one hand, they necessitate the transfer of
management of the company from the numerous shareholders into the hands of
a few managers. And, such a mechanism inherently carries with it the risk of
unfair advantage or exploitation by the managers against dispersed shareholders.
On the other hand, should any one or more persons own a chunk of the
corporate capital, control of the company will largely fall into their hands, and
small holders face the same or even greater risk of exploitation.
The Commercial Code of Ethiopia has basic rules on the governance of
such companies. However, these rules are not adequate to safeguard minority
shareholders from undue exploitation. This article attempts to deal with what the
potential problems can be and what type of legal change, if any, needs to be
made to address the newly evolving corporate governance issues in Ethiopia in
the context of publicly held companies for safeguarding minority rights. The
article does not promise or claim to provide the panacea for all corporate
governance problems in the country. Nor does it attempt to unveil the “vast
corporate governance malpractices” that are assumed to exist in the country. At
the current state of corporate disclosure this is almost impossible.1
1 The writer had to visit the National Bank of Ethiopia (NBE) several times to get some
statistical data on private banks. Unfortunately, his request was denied by the Bank’s
Legal Directorate, even if he had a letter of support which showed research objectives.
The Banking Business Proclamation 592/2008 apparently says nothing on disclosure
by the bank to the public. Quite inexplicably, such documents which should be with
the Ministry of Trade and Industry (as per the requirement of the law) do not exist
there in case of banks and insurance companies. However, Proclamation 592/2008,
under Article 10 (5) requires all banks to make available at their head offices free of
charge, to any interested person their share registers that show the names and voting
rights of their shareholders. The writer’s repeated attempt did not bear fruit in getting
the required information from the banks either, except from one. Understandably,
banks are more reluctant to disclose their documents. The realistic solution would be
to give this service at the NBE or MoTI level. If it is so difficult to get shareholder
data for academic purposes, it would be much more so for the investing public that

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