Sunday, August 30, 2020

ON FORMATION OF A SHARE COMPANY IN ETHIOPIA

Seyoum Yohannes Tesfay

 Journal of Ethiopian LawVolume 22, Issue 1, Jul 2008, p. 102 - 127

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Introduction 

A share company does not spring into being spontaneously. It rather results from planning and other preliminary arrangements by founders. These promotional activities of founders may be classified into three categories. The first is discovery, which consists of finding the business idea to be exploited. Investigation, the second category, involves research or analysis to determine whether or not the proposed business idea is economically feasible. The third category is assembly, which includes the dual process of bringing together the necessary personnel, property and money to set the business in motion and involves the secondary details of completing the formalities requisite to set up the company.

 

 

Fraudulent or careless practice in this formation process can undermine permanently the financial solidity, creditworthiness and profitability of the company. Such practice can also jeopardize the legitimate interests of future creditors of the company. Many legal systems, therefore, deem it necessary to provide safeguards to ensure that errors and malpractices fatal to the company and future creditors do not take place. Ethiopian law too has rules and institutions aimed at preventing malpractices and errors in the formation of a share company. This article aims at critically examining these rules and institutions with a view to throwing some light on those that lack clarity, identifying the lacunae, where any, and making suggestions to plug the legal loopholes.

 

To this end, the writer discusses the fundamental attributes of a share company that underlie formation in the section that follows. In the third section, he deals with the seven specific requirements for formation of a share company. Then follows section four where he dwells on contracts concluded on behalf of a company in formation. Defective formation and its consequences are analyzed in section five. In the very last section, the author summarizes his major findings and makes some recommendations.

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