The new Lebanese Commercial Law, Lebanon Law No. 126/2019, issued on 29 March 2019 and published in the official Gazette on 1 April 2019 came into force on 1 July 2019 (the Law).
The Law is an amendment to Decree-Law No. 304/1942 dated 24 December 1942and introduces changes aiming to simplify formalities and procedures and to enhance corporate governance rules. In addition to these amendments, the Commercial Registry introduced a number of new practices with which lawyers and legal practitioners will have to accommodate.
SIMPLIFICATION OF FORMALITIES
- Articles of Association of corporations can now be legalized in front of any notary public and no longer solely in front of the notary public in the area where the company’s headquarters are located.
- A company can also be domiciled at the law firm’s or lawyer’s office.
- The additional auditor is not mandatory anymore except upon the request of at least 10% of shareholders.
- Subscribed and unpaid shares can be sold by the company by virtue of a board decision without the need to go through the stock market authority.
- Meetings of general assemblies and board of directors, except those related to the preparation of annual accounts, can now be completed remotely and through video conference.
- Joint stock companies are no longer required to have a majority of administrators being Lebanese. Only a third of the board should be Lebanese.
- A foreign President-Directeur General [Director] of a Lebanese joint stock company is no longer required to have a work permit when he/she is not a Lebanese resident.
- Administrators can be any physical or moral person and are not required to be shareholders in the company, which abolishes the obligation to hold and place a guarantee share with the company.
- Accumulating terms for members of the board was increased from 6 terms to 8 terms for physical persons. The Chief Executive Officer can hold this role in 6 companies instead of 4, and the Director in 3 companies instead of 2.
- The age limit to be administrator of more than 2 companies is abolished (while it was limited to 70 years old previously).
- Shares held by the same shareholder for more than 2 consecutive years do not give that shareholder the right to a double vote for all companies incorporated after the coming into force of the Law. In already existing companies, the double vote can be abolished through a board resolution adopted by a unanimous vote of shareholders.
IN SEARCH FOR BETTER GOVERNANCE
- The Law dissociates between the functions of president of the board and general director (CEO) who manages corporate affairs. The president does not have the right to intervene in daily activities but can give unbinding directives to the director. The president is chosen amongst administrators while the director who has to be a physical person can be chosen amongst shareholders and non-shareholders.
- The Law allows for one or several assistant general directors to be chosen by the board under the recommendation of the president and general director. The assistant general director cannot be a member of the board but can be a shareholder
- An auditor can only be appointed for one year with a possibility to renew his/her term for a maximum of five consecutive years. Auditors cannot provide other services to the company or any shareholder holding in excess of 10% in the company’s share capital.
- All audited financial statements and board reports on the activity of the company during the fiscal year will be in the public domain and can be viewed by any person.
- A company’s board of directors has to prepare and submit financial reports on a yearly basis.
- The scope of Article 158 relating to conventional agreements has been enlarged to include not only agreements signed with members of the board, general directors and assistant general directors but also all shareholders holding directly or indirectly more than 5% of the share capital. The pre-approvals that these agreements are subject to, depend on the board of directors and are confirmed by the general assembly. All persons involved will not be able to participate in the vote and their shares will not be taken into account in the quorum calculations.
WHAT’S NEW IN THE LAW?
- The limited liability company (SARL) with a sole shareholder has been included following the offshore company.
- Preferred shares with no voting rights are available as well, with a limit of 30% of the total number of shares representing the company’s share capital. The president, administrators, general directors and assistant general directors, their spouses and children under the age of 18, are not allowed to hold directly or indirectly preferred shares. These shares will enable their holder to receive cumulative and non-cumulative dividends based on the company’s articles of association. Holders can still vote when preferential dividends are not received and/or in case there is any modification to the object of the company or its form, or in matters related to increase of capital, liquidation, mergers, acquisitions.
- The extraordinary general assembly can decide to convert these preferential shares into common shares subject to the conditions provided for in the company’s articles of association or in the minutes of meeting of the extraordinary general assembly session during which these shares were issued.
MERGERS AND ACQUISITIONS
Mergers can be done either by acquiring another entity, transmitting its assets to another company, or transmitting all assets to a third company. In matters of mergers and acquisitions the board of directors can be increased to 20 board members.
GDRs [Global Depositary Receipts] are normative negotiable titles that have underlying shares attached to them. This product is now available to Lebanese entities and can constitute up to 30% of all issued and paid up shares of a company. The underlying shares have to be deposited with Midclear as long as GDRs have not been reimbursed or converted into common shares, or the underlying company has not been liquidated.
Shares are now more flexible and give more prerogatives to investors in Lebanese companies.
This is a big step for the Lebanese economy but remains a lot to do in practice to initiate investors and company owners on these new practices.
NEW PRACTICES ADOPTED BY THE COMMERCIAL REGISTRY
The Commercial Registry now requires a document that shows the names of the company’s actual share beneficiaries.
For companies under formation, a document signed by all shareholders should be executed before a notary public.
For already existing companies, the authorised signatory can sign the document on behalf of all shareholders to certify that the holders of the shares are the actual beneficiaries of the financial rights attached to such shares. No notarisation is required in that case.
The National Social Security Fund (NSSF) Clearance
The NSSF clearance is not required anymore by the Commercial Registry for the following actions:
- Obtaining a certified true copy of any document in a company’s records;
- Updating the company’s bylaws;
- Issuing a new commercial circular;
- Approving a limited liability or a joint stock company’s annual financial accounts;
- Any transfers or changes in a board of directors’ composition; in that case a resignation letter is enough; or
- Any request resulting from an already existing document in the company’s records.
It is worth mentioning however that a renewal of a board of directors’ composition requires a NSSF clearance.
In the event of ashare transfer in a joint stock company, the Commercial Registry requires a copy of the share transfer document or of the minutes of meeting showing the share transfer amount. From now on, a 3 per mill fee is charged on such transfer.
Written by: Rami Alamé (Esq.) and Magda Farhat (Esq.)