The Ministry of Trade and Regional Integration (“The Ministry”) recently issued the Directive to Provide Commercial Registration, Licensing and Post-Licensing Inspection No. 935/2022 (“the Directive”) repealing the 2017 Directive (“Preceding Directive”) issued in pursuance to the Commercial Registration and Business Licensing Proclamation No. 980/2016 and Regulation No. 392/2016. The issuance of the Directive is apparently aimed at aligning current practice on commercial registration and business licensing with the recent changes and revisions introduced under the recently enacted Commercial Code of Ethiopia Proclamation No. 1243/2021 (“Commercial Code”), Commercial Registration and Business Licensing Amendment Proclamation 1150/2019 (Proclamation 1150/2019) and Commercial Registration and Licensing (Amendment) Regulation No. 461/2020.

In this Legal Update, some of the most important alterations and shifts in the Directive from the Preceding Directive are highlighted.

New Additions under the Directive

The Directive has encompassed provisions intended to implement certain elements incorporated in the Commercial Code. Some of the newer additions into the Directive relate to One-Member Private Limited Company; rules on Conversion of Business Organizations; and Capital Reduction.

One-Member Private Limited Company: The Commercial Code has recognized a One-Person /One-Member/ Private Limited Company (PLC) as one of the types of Business Organizations. In this regard, the Directive stipulates that a One-Person PLC can seek a Commercial Registration Certificate upon submitting a unilateral declaration of the member and authenticated certificate of trust. The Directive clearly dictates that the unilateral declaration shall replace the Memorandum of Association required in the case of PLC and SC. Additionally, the Directive enunciates that a One-Member PLC is also required to have a fictitious name instead of a natural one, similar to a PLC and Share Company (SC).

Rules on Conversion of Business Organizations: The Directive states that the conversion of a business organization from one to another can take place upon submitting an authenticated minute adopted by two-third majority votes representing the share capital of the former Business Organization. As indicated on the Directive, the conversion will result in the need for authentication of a new Memorandum of Association and changing of Tax Identification Number in the name of the converted Business Organization. Ultimately, the Ministry issues a new Commercial Registration Certificate and Business License in the name of the converted Business Organization. The Directive has provisions on the conversion of business organization in general but continues to particularly address the conversion of a Sole Proprietorship into a One-Member PLC. In this regard, for a conversion from a sole-proprietor to a One-Member PLC to take place, a sole proprietor is required to present a Tax Clearance Certificate and a Unilateral Declaration, in addition to meeting the criteria applicable for a PLC.

Capital Reduction: The understanding and application of capital reduction which was lacking in the Preceding Directive has now been addressed in the Directive. As such, the Directive stipulates that PLC, SC, or One-Member PLC, if desirous of reducing capital, may reduce their capital after presenting an authenticated minute endorsing their auditor’s presentation of the reason for and manner of the capital reduction. Moreover, the Directive states that registration of the reduced capital is to be executed, if no objection is filed within a month from the publication of the capital reduction in a widely circulated newspaper.

Revisions on Existing Rules

One of the key modifications in the Directive particularly in light of subsequent legislations namely, Proclamation 1150/2019, is that of the renewal of business licenses in cases where a company loses three-fourth of its capital. In this respect, the Directive comprises of provisions whereby a SC or PLC whose capital is lost or reduced by 3/4^th is allowed to decide on the dissolution or continuation of the Company; the latter of which can be done and the business license may be renewed upon raising the Company’s capital by 1/4^th of the registered capital. Unlike Proclamation 1150/2019 which provides for a similar provision, the Directive has set 90 days period to increase the company’s capital from the day the 3/4^th loss is known. Failure to implement the increase within this specified period would give third parties the power to cause the cancellation of the Company’s registration. Another key modification in relation to the Directive is the requirement for an external audit report. The Preceding Directive required for companies with 20 or more members to present an external audit report when requesting renewal for their business license. The Directive has modified the manner under which external audit report would be required during business license renewal. Accordingly, with the modification, an external audit report for PLC is to be required for those with 10 or more members or a PLC with its total assets of ETB 10,000,000.00 or more.

The Directive clearly sets out in its preamble that one of its objectives is creating a favorable ecosystem to do business in Ethiopia, by providing a cost effective, efficient and accessible commercial registration and business licensing supported with modern technology. In this regard, the Directive states that the Ministry’s services to issue, renew, substitute, amend and cancel licenses and certificates are to be carried out through an online system. While the Directive does not completely remove the manual system, it has modified most provisions in a manner to allow the service provision to be carried out in an online system, as long as such system is available. This important milestone by the Directive not only determines the Ministry’s plans to digitize the existing commercial registration and business licensing in Ethiopia but also legalizes the service provision of the Ministry through its online portal.

Concluding Remark

In addition to the introduction of some changes in relation to rules on commercial registration and business licensing, the Directive gives strong emphasis on digitizing services. Notwithstanding the positive outputs of the online system, the suitability and consumer-friendliness of the system as well as gaps in effectively implementing the legal rules within the online system is yet to be tested.