The Reform of the Lebanese Commercial Code : What’s new ?
By Célia Frébert
Lawyer at Marcel Sioufi Law Firm
The year 2019 was a source of great upheavals for Lebanon. The first that comes to mind is of course the October 2019 revolution. Yet another change has also occurred discreetly : a very important progress on the legislative front. The reform of the Commercial Code went almost unnoticed, at least for the general public.
On 1 April 2019, Law No. 126 amending the 1942 Commercial Code was published in the Official Journal. Since its creation, the Code has been amended several times, but the reform introduced in 2019 represents the biggest amendment adopted to date. Coming into force on 29th June 29, 2019, 3 months after its enactment, it has allowed to rejuvenate a Commercial Code often considered as outdated.
This law was adopted in the wake of the Economic Conference for the Development of Lebanon through Reforms and with Business (CEDRE), held in Paris on 6 April 2018. This conference, bringing together the highest French and Lebanese figures in the economic sector, aimed to encourage and support the country’s economy: the challenge was to ensure the economic development of the country through a series of reforms.
Although criticized by some, Bill N°126 allowed for a number of innovations to be introduced and made positive changes to some problematic provisions of the old Code.
How did these innovations translate in practice? What concrete changes were made?
Concerning the private limited company (S.A.R.L)
The Private Limited Liability Company makes it possible to limit the liability of the partners to the respective amount of their contributions and to protect the personal assets of each of these partners. Introduced in France in 1925, it is known in its modern form only since the law of 24 July 1966. In Lebanon, it appeared as early as 1943 in the draft of the Commercial Code but was not consecrated until August 5, 1967 via legislative decree No. 35.
In particular, the 2019 reform introduced a major innovation by allowing a one-person limited liability company amending the former Article 5 of the Code that stipulated "This company is formed by three or more persons, provided that the number of partners does not exceed twenty". The text resulting from the reform now stipulates «The limited liability company is established by one or more persons who bear the losses only up to their contributions ». The same person can hold all the shares of the SARL, thus allowing to lift the hypocrisy which reigned until then in which the merchant had to appoint as partners members of his own family in order to fulfill the requirements of the law.
Publishing requirements were also facilitated by the reform for the SARL. Before 2019, the decree law required the SARL to apply for the same formalities as the SA. Now, they simply have to register in the trade register.
Concerning Public limited Company (SA)
Public limited companies were the most affected by the reform. A SA is, as conceptualized by Article L225-1 of the French Commercial Code, a company whose capital is divided into shares and which is constituted between several shareholders who bear the losses only up to the amount of their contributions.
The former Article 80 of the French Commercial Code stipulated that “The Articles of Association and any subsequent amendment must be filed and registered with the notary of the place of registered office of the company”. With the reform, companies can now turn to any notary, thus eliminating the territorial jurisdiction over the constituency.
This is a welcome change, since the constituency is sometimes difficult to determine and sometimes does not allow the resort to the nearest notary to the company’s registered office. In addition to this amendment, companies can now be domiciled with their lawyer.
The Board of Directors has also undergone some changes. The former Article 144 stipulated that «the majority of the members of the Board of Directors of a Lebanese public limited company must have Lebanese nationality». The new text lowered this condition by considering that only one third of the members must be of Lebanese nationality. The President and Chief Executive Officer of foreign nationality is no longer required to obtain a work permit.
Cumulative mandates were also reviewed. Section 154 was worded as follows: “No person may serve more than four terms as president provided that he or she appoints general managers for two or more of the four companies of which he or she is president.
No one may be a director of more than six companies with head offices in Lebanon.
If the director is over seventy years of age, he cannot be a director of more than two corporations.”
From now on, it is possible to serve as president for up to 6 terms instead of 4, directors can serve in up to 8 companies instead of 6, and the age requirement has been abolished for directors. Moreover, contrary to what was enshrined in the old version of the Code, it is no longer necessary to be a shareholder to be a director. A director may be chosen and designated from among any natural and legal person (except the president who must necessarily be a natural person).
On the dissociation between Chairperson and Chief Executive Officer
Another major change was made this time : the dissociation between the powers of president and chief executive officer. Already very present in the Common law system, this practice was also introduced in Lebanese law by the 2019 reform.
This dissociation of functions is popularizing everywhere even in the French system where this possibility was not initially foreseen before 2001. Large companies are increasingly attracted by this option and the French food giant Danone recently announced that it wants to use this separation.
In the event of dissociation, the President of the Board of Directors chairs the meetings of the Board of Directors, ensures the proper functioning of the company and may issue directives to the Chief Executive Officer, who is not, however, binded to follow them. The President shall be chosen among the directors. The CEO, otherwise, may be any natural person with or without shares in the company, and is therefore not necessarily chosen from among the directors. This dissociation leads to the creation of a Chairperson with very limited prerogatives.
Dismemberment of bare ownership and usufruct shares
Shares, as well as property rights, can be dismembered.
The reform recognized this concept and defined respectively the rights and obligations of the bare owner and the usufructuary in the absence of an agreement to the contrary between the two parties. The bare owner shall have the right to vote in extraordinary general meetings, while the usufructuary shall vote in ordinary meetings. The usufructuary may not be elected as a member of the Board of Directors unlike the bare owner. The usufructuary is entitled to the dividends and the bare owner is entitled to receive the value of the redemption of the shares and the distributions that may arise in the event of liquidation of the company. This division may nevertheless be subject to specific amendments in the company’s charter.
Concerning preferential shares:
Preferred shares are a specific type of shares that can only be used in joint stock companies such as SA and SCA. Special rights are attached to these shares as they differ from ordinary shares. They do not allow its holder to vote in general meetings, nor to be elected as a member of the Board of Directors.
They also do not receive a share of the social assets at the time of liquidation. The holder may, however, obtain a dividend on the profits in priority to the other shareholders. The sum is defined in the SA’s charter
According to the new article 121-5, the holders of these shares will have a voting right similar to that of the other shareholders in 3 specific cases. “If the company does not confer upon them the rights and privileges attached to their shares, and until they have been applied to them; or if their priority dividends have not been paid to them, in whole or in part, for a given fiscal year, whereas the company had made profits, and as long as the payment was not made”i. Finally, they are entitled to vote in the General Meetings when the purpose of the meetings is to change the form and object of the company, to merge it, to liquidate it, divide it or to increase its capital.
The introduction of these actions is one of the major innovations of the 2019 reform.
Other notable innovations
In terms of criminal liability, two major innovations were also introduced by the reform. The misdemeanor of misuse of company assets appears for the first time in the Commercial Code.
The introduction of this new crime is not insignificant and responds to a global need to fight against corruption. This offense already existed in French law in Article L241-3 4. of the French Commercial Code. It provides that is punished by 5 years of imprisonment and 375,000 euros of fine. “The fact, for the managers, to make, in bad faith, the property or credit of the company, a use that they know contrary to the interest of it, for personal purposes or to promote another corporation or business in which they have a direct or indirect interest.” The Lebanese reform took up this concept and attached to this offense a sentence ranging from 3 months to 3 years' imprisonment and a fine ranging from 25 times to 100 times the minimum wage.
The offense of drawing up false balance sheets was also introduced by the reform and is subject to the same prison sentence as the offense of abuse of social property. This fine can fluctuate between 25 and 50 times the minimum wage. The same punishments will be imposed on surveillance commissioners who intentionally prepare and publish false balance sheets to conceal the real situation of the company.
In terms of statute of limitation, extensions have been made: the action in social or individual responsibility is prescribed after 5 years against 3 previously.
It is no longer necessary to hold Board of Directors meetings in person: they can be held via video-conference. The purpose of this initiative was to ensure the presence of directors. This provision has proven to be of critical use during the pandemic.
Regarding the publicity formalities specific to the establishment of the SA, they will be carried out exclusively, after the entry into force of the reform, in 2021, electronically. This could herald impending confusion.
In the end: what are the benefits?
This reform, in some aspects, represents a fundamentally positive evolution of the Commercial Code. The reform made it possible to put into practice practices that were already taking place and that had been enshrined in the doctrine for a long time.
However, it remains criticized because of the lack of coordination of the new texts with the old ones.
The legislator has taken up, in a large part, provisions that were already in the French Commercial Code without really addressing the problems that this legal registry entails.
Lebanese law remains a special and autonomous law, in this respect it is more than necessary to make amendments to the draft transposition of foreign law before attempting to transpose it as is in the internal order.
However, this reform remains satisfactory and its shortcomings can be easily remedied in order to achieve a homogeneous legislative structure.
i. Serge Airut « Entrée en vigueur du nouveau Code de Commerce », Le Commerce du Levant, publié le 5 juillet 2009 https://www.lecommercedulevant.com/article/29160-entree-en-vigueur-du-nouveau-code-de-commerce