Among the seventeen member States which are part of the Organization for Harmonising Business Laws in Africa (“OHADA”), it became clear in recent years that reform of the initial Uniform Act relating to Commercial Companies and Economic Interest Groups (adopted on April 17, 1997) was required. It was felt that substantial adjustments were necessary in order to sustain the economic growth of the OHADA region.
On January 30, 2014 the OHADA Council of Ministers adopted the Revised Uniform Act relating to Commercial Companies and Economic Interest Groups (“Revised Companies Act”). The Revised Companies Act was published in the OHADA Official Gazette on February 4, 2014 and entered into force on May 5, 2014.
The Revised Companies Act introduced significant change and has been widely commented upon. The introduction of a Société par Actions Simplifiés, largely based on the regime in France, is one of the most significant changes introduced by the Revised Companies Act. This flexible corporate structure, which has no minimum capital requirement, has been praised by many as an appropriate tool to encourage foreign investment.
Two years after the implementation of the Revised Companies Act, it is worth considering an issue which is of particular interest in the energy sector: the Revised Companies Act revised article 120, which required a branch registered by a foreign company to be converted into a subsidiary within two to four years from the registration of such branch.
Unfortunately, the amendments effected by the Revised Companies Act did not provide a necessary level of clarifications and stability. Following a summary of the regime applicable under article 120 of the Revised Companies Act, we will analyze the uncertainty related to:
- the enforcement of the sanctions provided for under Article 120;
- the enforcement of the exemption provided for under Article 120; and
- the lack of an interim regime for applying Article 120
In the OHADA member States, a branch is defined as a commercial, industrial or service-providing establishment which belongs to a company or a natural person and which has been granted a certain degree of autonomy. It does not have any legal personality distinct from that of the parent company which owns it. It can be registered locally by a foreign company and it is governed by the law of the OHADA member State in which it is registered.
In the prior version of the Uniform Act, article 120 provided that a branch registered by a foreign company (a company which itself was registered outside an OHADA member State) had to be converted into a subsidiary within two years (as from its registration date). However, a waiver could be granted by order (arrêté) of the minister in charge of trade in the OHADA member State in which the branch was located. No limitation was provided by the Uniform Act regarding the duration of such waivers or the number of waivers that could be obtained, and each OHADA member State was entitled to freely establish its own rules in this respect. It had thus became customary for foreign companies (particularly those active in oil & gas exploration or in the power sector) to register a branch and to obtain a waiver from the requirements provided by article 120 for an unlimited period of time.
The Revised Companies Act amended the regime applicable to branches and provides that
“Where the branch is owned by a foreign person, it shall be [converted] to a company in existence or to be created, governed by the laws of one of the Member States not later than two years after the branch is set up, unless this obligation is waived by order of the minister in charge of trade in the Member State in which the branch is located.
Subject to the provisions applicable to companies that are subject to a specific regime, the waiver is granted for a period of two (2) years, non-renewable.
In case of violation of the provisions mentioned in the first subparagraph of this article, the registrar or the relevant body of the Member State shall remove the branch from the register of trade and personal property credit (“registre du commerce et du crédit mobilier”), following a decision of the relevant court, ruling upon request, at its request or at the request of any interested person.
The decision of removal is published, by the registrar or the relevant body of the Member State, in a journal entitled to receive legal notices of the Member State.”
Thus, the biggest change as compared to the previous provision is that the waiver granted is now limited in time i.e. a nonrenewable two-year period.
It should also be noted that article 891-2 of the Revised Companies Act also provides that “a criminal sanction applies to the managers of a foreign company or to a foreign natural person, the branch of which has not, within two (2) years, either been [converted] to an existing or newly incorporated company of a Member State or closed in accordance with the provisions of Article 120”
The Revised Companies Act introduces two sanctions applicable in the event of breach of Article 120:
- The removal of the branch from the register of trade and personal property credit (“registre du commerce et du crédit mobilier”);
- A criminal sanction (the nature of which is not specified).
This is a major change which should have a strong impact on ensuring compliance with the requirements. Under the previously applicable regime, sanctions were to be determined and implemented separately in each Member State. In practice, this resulted in very few, if any, sanctions applicable in the event of breach of the provisions of Article 120.
Unfortunately, the sanctions provided under the Revised Companies Act are unclear for several reasons:
- Nothing under the Revised Companies Act expressly prohibits a company from registering a new branch (valid for a period of two years) following the removal of its former branch from the register of trade and personal property credit (“registre du commerce et du crédit mobilier”).
This solution is obviously not in line with the spirit of the Article 120 of the Revised Companies Act.
However, from a strict legal point of view, subject to any contrary provisions in the laws applicable in each Member State, there is no legal ground to challenge this solution.
- The enforcement of the criminal sanction is subject to the occurrence of two events: (i) the branch has not been converted to an existing or newly incorporated company of a Member State and (ii) the branch has not been removed from the register of trade and personal property credit (“registre du commerce et du crédit mobilier”).
However, according to Article 120 of the Revised Companies Act, the branch shall only be removed from the register of trade and personal property credit (“registre du commerce et du crédit mobilier”) by the registrar or the relevant body of the Member State further to a decision of the relevant court.
Therefore it appears that one of the criteria for the implementation of the criminal sanction is outside the responsibility of the foreign company.
This creates legal uncertainties and will require clarifications by each OHADA member State.
- The Revised Companies Act does not provide for a specific criminal sanction.
In this context, it is up to each member State to put a specific regime in place. If this is not done, no criminal sanction will apply in the event of breach of Article 120 of the Revised Uniform Act.
The uncertainty related to the enforcement of the exemption provided under Article 120 of the Revised Companies Act
Article 120 provides for an exemption to the non-renewable two-year waiver rule applicable to companies that are subject to a specific regime.
This exemption provides for the flexibility which is required in certain economic sectors.
No definition of “specific regime” is provided. Companies subject to a specific set of rules (including a specific tax regime) are traditionally considered as falling within such definition (e.g. oil & gas companies, banks, etc.). Unfortunately, a great level of uncertainty remains as this definition is subject to the interpretation of each OHADA member State.
For instance, in Gabon, the Law n°011/2014 dated 28 August 2014 (the Petroleum Code) provides that the branch of a foreign company does not have to be converted to a Gabonese company during the exploration period (prior to the application for a development and exploitation authorization) which can last up to seven years. Such provisions imply that Gabon considers that companies conducting oil & gas exploration works are subject to a specific regime and benefit from the exemption provided by Article 120. However, most OHADA member States have not confirmed this interpretation and, in practice, we are aware that an oil and gas company involved in exploration operations was recently granted a non-renewable two year waiver on the basis that the exemption provided under Article 120 did not apply.
In addition, how the regime actually applies to companies that are subject to a specific regime is unclear. A strict interpretation of Article 120 leads us to believe that such companies must request an exemption after the initial two year period. Indeed, the exemption only seems to apply to the duration of the waiver (i.e. it could be more than two years or it could be renewed more than once). In practice, no confirmation has been given as to how this provision applies. We note that the regime provided in Gabon under the Petroleum Code is not in line with this interpretation, as an exemption is granted from the registration of the branch until the application for a development and exploitation authorization.
Under its interim regime, the Revised Companies Act provides inter alia that companies incorporated prior to its entry into force must adapt their articles of association to comply with the new applicable regime within two years. However, the Revised Companies Act does not provide for any interim regime applicable to branches registered by foreign companies prior to its entry into force. Accordingly, the interim regime applicable to the branches must be determined in each OHADA member State.
To date it appears that no sanction has been applied in any OHADA member State to foreign companies that registered a branch prior to the entry into force of the Revised Companies Act. However, potential risks cannot be excluded.
Article 120 does not provide legal certainty for foreign companies operating in the OHADA region.
In this context (and in light of the potential sanctions), foreign companies should adopt a conservative approach and should comply with the provisions of the Article 120.
One way to do so is to carry out the conversion by way of an autonomous branch conversion agreement (apport partiel d’actifs), which appears to be an appropriate legal structure for this purpose. It requires the branch to contribute all the assets and liabilities of its business to a local subsidiary. Its main advantage is that it enables the transfer not only of the assets of the branch but also the liabilities.
The legal regime and documents required by this autonomous branch conversion are similar to those of a demerger. In particular, the following key steps must be followed:
- incorporation of a local subsidiary by the foreign company;
- preparation of a draft branch conversion agreement to be entered into between the converting foreign company and the newly incorporated subsidiary – the draft conversion agreement will list the assets and liabilities being converted on the basis of the companies’ annual or intermediary accounts established for this purpose. It will be approved by the management of the two companies.
- appointment by the local commercial court of an independent conversion appraiser (who will issue a report on the net value retained for the converted assets and liabilities)
- after a 30-day period to allow creditors of the converting company to object to the conversion, approval of the branch conversion by the shareholders of each company, which shall be remunerated by a share capital increase of the benefiting company; the issued shares being subscribed for by the converting company; and
- relevant registration and publicity formalities.
In parallel to the above, the transfer of the various contracts and authorizations of the branch (some of which may have to be re-issued directly to the benefit of the local subsidiary as they may not be transferrable) will have to be dealt with.
It should be noted that this is a simplified summary of the various steps required for a branch conversion. The process can be lengthy and often requires at least six months even where no major issues arise.