Increasing Capital of Share Companies under Ethiopian Law

Abstract

The biggest concern of the law during capital increase is the protection of minority shareholders. In this regard, the law creates some safeguards. The first protection relates to placing the power of increasing capital in the hands of the extra ordinary general meeting which is subject to higher quorum and majority rules. The second protection involves pre-emptive rights of shareholders to new issue of shares in proportion to each shareholder’s existing shareholding, which can only be bypassed under very stringent conditions. Where pre-emptive right is bypassed, fair valuation of new shares is provided as an alternative remedy. Other exceptional remedies include each shareholder’s right to veto down capital increase resolutions, or opt-out right from the increase resolution, depending on different contexts. In terms of the authority to decide on increase, Ethiopian law recognizes the ultimate power of the shareholders meeting to determine increase of capital, including the amount and the manner of the increase. Contrary to many other laws that give wider power to the board of directors to increase capital under delegation, Ethiopian Commercial Code limits the board’s power to merely implementing the decision of the general meeting. However, careful examination of the law indicates that under the delegation of the general meeting, the board can do more than merely implementing the decisions of the meeting. The law should be interpreted as allowing delegated capital increase by the board of directors in order to introduce efficiency in capital raising which, inter alia, may extend to the extent of exercising discretion to bypass pre-emptive rights. With such schemes, efficiency for the company and fairness towards minority shareholders should be balanced.