Corporate Governance In The Code Of Commerce - EIG

By Nisrine Salhab (Founder of Salhab Partners)

The law No. 126 of March 29^th, 2019 brought new amendments to the Commercial Code and added new provisions, some of which introduce core corporate governance principles into the legal framework of joint stock companies. Here is a brief lighting on these new provisions, classified according to the corporate governance principle to which they relate. All references are to articles of the Commercial Code as amended. Finally, it should be noted that additional rules may apply to some joint stock companies pursuant to the provisions of the Law on Financial Capital Markets.

I- The rights and equitable treatment of shareholders and key ownership functions

a) Possibility to vote in abstentia: The possibility for a shareholder to attend and vote in abstentia at shareholders’ meeting has been improved by allowing him (or her) to:

• give a proxy to a non-shareholder to represent him (or her), provided however that such possibility is foreseen in the Articles of Association (articles 181); before the entry into effect of Law No. 126, shareholders could give proxies to other shareholders only; and
• attend and vote through electronic means (article 181).

b) All shareholders of the same series of a class should be treated equally: In companies to be created as from July 1, 2019, Article 117 abolishes the double voting right which was previously automatically granted by law to shares for which registration for at least two years, in the name of the same shareholder had been justified. Double voting rights will however continue to apply in joint stock companies created before that date, unless they are cancelled by a unanimous vote of the shareholders convened in an extraordinary meeting.

c) Related-party transactions: Law No. 126 has added to the definition of related-party transactions those that are executed with the chairman, the chief executive officer, the deputy general managers, with shareholders holding –directly or indirectly- more than 5% of the voting rights and with companies in which any of the aforementioned persons is a shareholder who owns more than 5% of the voting rights, a manager or a director, or a partner or general partner if the other company is a general or limited partnership respectively (Article 158).
The authorization process has become a two-step mechanism: the board of directors must first give its authorization in principle, but said authorization will become effective only upon ratification of the related-party transaction by the shareholders’ assembly.
The law has additionally clarified that interested parties may not take part in the vote and their votes will not be used to calculate the quorum or the voting majority, both in the board of directors and in the shareholders’ meeting. 
The persons above mentioned must immediately inform the board of any related-party transaction in writing and give all relevant details.
The board must inform the auditors of the related-party transactions within 15 days from the date it approved them.
Finally and subject to certain exceptions provided by other laws, the company is now prohibited from granting its directors, chairman, chief executive officer, deputy general managers, auditors and shareholders who own – directly or indirectly- more than 5% of the voting rights, loans, facilities, securities or any guaranties towards third parties. 

d) Protection of shareholders from abusive actions: Law No. 126 has introduced the concept of the directors’ duty of loyalty. Article 253-1 provides that if the chairman, the board members, the managers and authorized signatories injure the company out of bad faith by (i) using its assets or fiduciary capacities contrary to its interests for their personal purposes or (ii) by working in the interest of another company or enterprise or person with whom they have a direct or indirect personal interest, then they may be sentenced to prison and fined. Law No. 126 has also extended to the chairman, the chief executive officer and the deputy general managers, the obligation that was initially set upon the board members to obtain the approval of the shareholders’ assembly to participate in the management of a company that has a similar object or activities (Article 159).
In addition, the auditors have to point out in their annual report the cases where the company did not comply with its articles of association and applicable laws and regulations (Article 174).

e) Rules and procedures governing extraordinary transactions: The new law has expanded the provisions relating to extraordinary transactions such as mergers and splits. It has notably mandated the deposit of the merger or split project at the Commercial Registry and the publication of a summary of its terms in the Official Gazette and a local newspaper or by electronic means within one month for the project’s approval by the extraordinary general assembly (Article 213-2).

II- Disclosure and Transparency

a) Access to information: Article 197 introduced the concept of sharing the information with the shareholders by dedicated electronic means that the company puts in place (Article 197). 

b) Information regarding beneficial owners: The new law requires that companies publish at the Commercial Registry the identity of beneficial owners (Article 101). In doing so, the Lebanese law has exceeded disclosure requirements applicable in the European Union notably, where the registry of beneficial owners is not open to the public but only to certain authorities.

c) Related-party transactions: The special reports prepared by the management and auditors regarding related-party transactions must be published at the Commercial Registry. In addition, the auditors must indicate in their special report whether in their opinion the contemplated related-party transactions may affect the financial statements and notes thereto (Articles 101 and 158).

d) Risk factors: The new Article 101 describes the principal information that the board’s report must include, among which the situation of the company and its activities during the previous year, progress achieved and difficulties encountered, expected development of the company’s situation, indication of the foreseen risks and important operations that took place between the year end and the date of the meeting.

e) Auditors’ independency: Under the previous provisions, auditors could be reappointed indefinitely for one-year terms. The new Article 172 limits their overall tenure to 5 years. More importantly, external auditors are now prohibited from providing any services outside the scope of their audit mission, including consultancy services. The prohibition includes the provision of such services to the company obviously but also to a shareholder or a group of shareholders that own 10% or more of the company’s capital.
As previously mentioned, the company is explicitly prohibited from granting its auditors loans, facilities, securities and guaranties towards third parties.

f) Auditors’ accountability: The new Article 167 expressly provides that auditors may be held liable for the payment of the company’s debts in case of bankruptcy and insufficiency of assets.

III- Responsibilities of the Board

Board’s objective independent judgement on corporate affairs: The new law has allowed the separation of the posts of chief executive and Chair, which separation should be stipulated in the articles of association (Article 153). In case of separation, Article 175 provides that the chairman of the board will have a supervisory role over the activities of the company, he (or she) will chair the board meetings and may give the chief executive officer general guidelines, which will however not be binding upon the CEO. It is the responsibility of the chief executive officer to represent the company, to execute the decisions of the board of directors and to manage the day-to-day affairs of the companies as described in the articles of association or by practice, under the supervision and control of the board of directors.
The new law has also removed the obligation for the directors to hold shares in guarantee of their management. This opens the door for the appointment of truly independent directors, although the legislator did not seize the opportunity to impose the appointment of independent directors to the board, already a legal requirement in the banking sector.
Finally and in order to ensure that board members are able to commit themselves effectively to their responsibilities, Article 154 provides that no person may preside over more than six boards of directors of companies in Lebanon, have more than three mandates of general manager (i.e. CEO) or deputy general manager in companies having their head office in Lebanon, or be a member in more than eight boards of directors of companies having their head office in Lebanon. It is true that the new provisions of Article 154 have increased the number of mandates (and added the limitations regarding general managers and deputy general managers, which did not exist), probably in consideration of the significant number of family groups, but it has also provided for a severe penalty in case of infringement: any stakeholder may request from the company and the contravener to abide by the limitations set out in said article within a time limit of two months, failing which  the latter will be considered as having resigned. In case of persistence of the breach, any stakeholder may request the competent court to nullify the board’s resolutions taken in the presence of the contravener. Article 154 adds that the contravener must return the salaries and bonuses s/he has received as from the occurrence of the breach.

In amending the Commercial Code, the legislator’s aim has been to improve corporate governance practice, although it has not made the reform/revolution that practitioners hoped for and in certain instances has taken extreme positions that may jeopardize corporate interests. It has nevertheless made some corrections and substantial changes that will undoubtedly positively affect companies’ corporate culture.