Tuesday, August 25, 2020

General Requirements for the Formation of Share Companies

 General Requirements for the Formation of Share Companies

In principle, there are certain general requirements for the formation of share companies in the absence of which a valid share company having legal personality is inconceivable.

Partnership agreement

To begin with, a valid partnership agreement, inter alia, is one of the essential requirements for the formation of a share company. That is, in order to establish a valid share company, there should be a valid partnership agreement out of which the business organization arises. This is evident from the following provision of the Ethiopian commercial code.

      Art. 210(1)- “ A business organization is any association arising out of a partnership agreement.”

Thus, the existence of a valid partnership agreement to be made in writing is one of the essential requirements for the formation of share companies.

b)  Formation to be in writing.

Further, it is an essential requirement that the formation of a share company shall be made in writing. Accordingly, Art.214 of the Comm. Code states that the formation of any business organization other than a joint venture shall be of no effect unless it is made in writing (emphasis added). There is no possibility of a share company to be formed in any other form other than in writing.

c) Registration and Publicity

Registration and publicity are also other essential requirements for the formation of a share company in the absence of which the company would be devoid of legal personality. Art.100(1) of the comm. code provides that any business organization carrying out commercial activities in Ethiopian shall be registered. Up on filing the application for registration, the official in charge of the register shall examine whether or not the legal conditions relating to the formation of the share company have been fulfilled.

Similarly, as regards the requirement of publicity, it is understandable from Art.219 of the Comm. Code that a share company as a form of business organization shall be made known to third parties. Such publicity shall be made by a notice published in a newspaper empowered to publish legal notices, by the deposit of two copies of the memorandum of association and all complementary documents, if any, with the official in charge of the commercial register.

Art. 223- Effect of publicity

“ A business organization shall have no legal existence nor personality until all the provisions of this code relating to publicity have been complied with and registration is published in accordance with Art. 87 of this Code.”

Therefore, it is crystal clear from the reading of the afforecited provision that failing publicity, a share company shall have neither legal existence nor personality in the eyes of the law.

Even though it is necessary that all the legal requirements for the formation of a share company should be complied with, as per Art. 324 of the comm. Code where publication and registration have been made, the company shall have a legal existence and personality notwithstanding that all the legal requirements relating to the formation of the company have not been complied with.

d) Full subscription of a capital and payment of the par value of the shares.

There are also other general requirements provided under Art. 312 of the Comm.Code that a share company shall not be formed until the capital has been fully subscribed and one quarter at least of the par value of the shares has been paid up and deposited in a bank, in the name and to the account of the company.

e) The required legal minimum of value of the capital.

Any business organization has its own initial capital to be established whether the amount has been fixed by law or not. unlike other forms of business organizations, the law expressly fixes the legal minimum capital for both share and private limited companies. Accordingly, as per Art. 306 (1) the required minimum value of the capital that must be raised initially for the formation of a share company shall not be less than 50,000 Ethiopian Birr.

f) Memorandum of association

Furthermore, the law requires as per Art. 313 of Comm.Code that the formation of a company shall be by a public memorandum of association- the founding instrument- in which contained are, inter alia, the business purpose of the company, the amount of capital subscribed and paid up, the par value, number, form and classes of shares etc. of the company.

g) The legal minimum number of members.

Art. 307(1). “A company may not be established by less than five  members.”

Thus, unlike partnerships, the legal minimum number of members required for the formation of a share company is five. Even after it is formed, no company shall remain in business for more than six months after the number s. Before coming into existence, basis for valid formation should be laid down by certain persons. These people conduct feasibility- study of the proposed venture and test the plan with objective reality prevailing at certain targeted environment.

Those persons laying down the foundations and carrying out the pre-formation management of the company are called founders (promoters). The classes of persons having the status of founders and their minimum number have been provided in the Commercial Code.

               Art. 307 – Founders

1)                   A company may not be established by less than five members.

2)                   Persons who sign the memorandum of association and subscribe the whole of the capital shall have the legal status of founders.

3)                   Where a company is to be formed by the issue of shares to the public, persons who sign the prospectus, bring in contributions in kind or are to be allocated a special share in the profits shall have the status of founders. 

4)                   Any person even though outside the company, who has initiated plans or facilitated the formation of the company, shall have the status of a founder.


It follows from the above provisions that the expression “founder” covers a wider range of persons and is a question of fact. It may range from village grocer to a professional promoter to the full extent each undertaking to form a company with reference to a given project. 

 More precisely, all persons who are directly or indirectly involved in the establishment of a share company are given the status of founders. Formation of share company exclusively among the founders is sometimes called closed company, for the founders alone subscribe the whole approved and issued capital of the company. This makes such a share company similar to a private limited company.

Thus, in the case of a share company formed among the founders, where shares are not offered by public subscription, the founders shall, as per Art 316, show in the memorandum of association that all the shares have been allocated; that one- quarter at least of the par value of the share has been paid up and deposited in a bank in the name and to the account of the company and that the valuation of contribution in kind has been made in accordance with Art. 315 of Comm. Code. Moreover, the founders shall show in the memorandum that they have provided for the administrative organs of the company. It is also worth noting that where a share company is formed among the founders, all the general rules and procedures of the formation applicable to all forms of commercial business organizations other than joint venture are also applicable to the company so formed.

Formation by Public Subscription.

Apart from the formation of a share company among the founders discussed so far, the other way of forming a share company is through public subscription. A share company of this kind may be formed through public contribution in accordance with Arts. 318- 322 of the Comm. Code in which the founders invite the public offering shares and the contribution of subscribers (persons purchasing shares or agreed to purchase shares) will be financial basis to the company. This is the only way in which shares will be accessible to the public at promotional stage of the company.

Compared to the first formation of share company among founders, formation of share company by public subscription is rare in Ethiopia. Almost all of share companies in Ethiopia are formed between the founders. This may be due to lack of stock exchange market and trust between businesspersons in Ethiopia. Thus, only very few share companies such as Wegagen Bank s.c., Abyssinia Bank s.c, United Bank s.c., and ALFA University college s.c are examples of share companies formed by public subscription that advertise the sale of shares through mass media in Ethiopia.

In order to form a share company through public subscription, certain procedures should be followed. These are primarily after the founders complete their ideal company into tangible venture, for instance, after drafting the memorandum and articles of association and valuation of contributions in kind, they should issue a prospectus signed by all of them.

The prospectus is a legal document that usually contains information about the company to be formed and that includes the text of the draft memorandum of association, a summary of the principal provisions of the articles of association, the expert report of the valuation of contributions in kind and etc as provided under Art. 318 of the com. Code.

Following the issuance of the prospectus, application for shares shall be made by any member of the public on the form provided and deposited in the place of application.

Finally, after applications for shares are made and all formalities of such application are fulfilled and the time for application has expired, the founders shall call a meeting of the subscribers as per (Art 320). The purpose of the meeting shall be to verify that the requirements relating to the formation of the company have been complied with, to draw up the final text of the memorandum and articles of association; to approve contributions in kind, if any and the share in the profits allocated to the founders, and to make all appointments required under the memorandum of association. All the resolutions of the meeting must then be signed by the founders and all other documents be submitted to the meeting annexed thereto.


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