The reform creates interesting new possibilities for the structuring of investments, in particular through the SAS, preferred shares and subordinated securities. Regarding the reinforcement of the obligation to convert the branches into companies rapidly, the resulting transfers of assets have to be monitored closely in practice to secure and optimize their tax impacts.

The OHADA Uniform Act Relating to Commercial Companies and Economic Interest Groups (hereafter the “Uniform Act Relating to Companies”) has recently been subject to a major revision. OHADA thus seizes this important opportunity to take advantage of 20 years of case law and practice relating to the French SAS and combined securities.

The Council of Ministers of OHADA adopted the revised Uniform Act Relating to Companies on 30 January 2014. The revised Uniform Act Relating to Companies was published in the OHADA Official Gazette on 4 February 2014 and will enter into force 90 days after such publication, i.e. on 5 May 2014.

The Uniform Act Relating to Companies introduced the “Société par Actions Simplifiée” (SAS) (Simplified Joint Stock Company), expressly recognized the validity of shareholders’ agreements, and created new categories of securities, permitting OHADA countries to benefit from the legal tools required for the implementation of private equity operations and supporting the economic growth of sub-Saharan Africa. Other amendments to the Uniform Act Relating to Companies must also be highlighted.

OHADA law incorporates tools allowing the implementation of new legal and financial schemes

A new type of joint stock company

The Uniform Act Relating to Companies creates the “Société par Actions Simplifiée” – SAS (Simplified Joint Stock Company) (articles 853-1 to 853-23), based on the French SAS model. The SAS offers far more flexibility to the shareholders and managers than the “Société Anonyme” - SA (Public Limited Company), the most commonly used vehicle for the implementation of foreign investments in Africa until now. With the introduction of the SAS, the OHADA zone benefits from a type of company more suitable for investment operations than those existing in other countries that boast similarly dynamic economies.

An SAS can be registered with no minimum share capital requirement and have both legal and natural persons as shareholders. Its mode of governance is flexible and can be tailored to the shareholders’ needs. When an SA must be administrated by a Board of Directors - if its share capital is held by more than three shareholders - the Uniform Act Relating to Companies provides that, subject to compliance with mandatory rules (i.e. representation of the company by a President, who is vested with broad powers to act on behalf of the company with third parties and is the only mandatory corporate organ; exclusive power of the shareholders’ general meeting for some corporate decisions such as those relating to (i) annual accounts and profits, (ii) the share capital or (iii) the transformation of the company), the articles of association of the SAS can freely provide for the organization, the management and the functioning of the company. This includes the possibility to appoint general managers, deputy general managers, an executive committee, a supervisory board, and etc.

Such flexibility will allow for the setting-up of governance modalities adapted to the different profiles of the investors in private equity operations, but also within the framework of joint-ventures between a local partner (for example, a national company) and a foreign partner.

Express recognition of the validity of shareholders’ agreements

The Uniform Act Relating to Companies (article 2-1) now expressly provides for the possibility to enter into agreements in addition to the articles of association in order to freely organize the management of the company.

The main provisions of such agreements will concern the organizing of the decision process between the different shareholders (setting-up of governing bodies, veto, prior authorizations, increased information) and also the movements concerning the share capital (restriction of transfer of shares, insertion of inalienability, prior approval, preemption, anti-dilution clauses, etc.) and the shareholders’ exit (tag-along, drag along, first offer clause, etc.).

It must be observed, however, that this is possible only if the mandatory provisions of the Uniform Act Relating to Companies and the provisions of the articles of association are respected. The Uniform Act Relating to Companies clearly states the hierarchy between the applicable provisions relating to the above mentioned issues.

The creation of new categories of securities

Subject to the respect of “corporate public order” (prohibition of one-sided unconscionable clauses, limitation of a double voting right for multiple-voting shares), the creation of preferred shares (articles 778-1 to 778-15) will allow granting specific shares to shareholders with increased or reduced financial and / or voting rights according to their type. Such a mechanism will be used in private equity operations and can also be of interest in the context of partnership agreements with State entities (most notably exploration and operating companies in the Oil & Gas and mining sectors).

The introduction of the notion of subordinated bonds in the OHADA law (article 747-1) and the creation of compound securities (articles 822 to 822-21) will allow the establishment of new financing, the use of quasi-equity finance most notably with bonds convertible into shares, mezzanine finance, and the offering of additional remuneration at the unwinding of transactions through a deferred access to the share capital. Because the law permits the issuance of free shares to employees (Articles 626-1 to 626-6), attractive “management-packages” can now be created.

Other significant amendments

Among the other significant amendments, we highlight:

  • The limitation of the use of branches: Previously, the Uniform Act Relating to Companies provided that branches owned by foreigners must be contributed to a local company not later than two years after the branch is set up unless the trade minister ordered the waiver of this requirement. Businesses were thus able to obtain, upon being granted the authorization by the relevant minister or the delegated administrative authority, a sometimes indefinite extension of such waiver despite significant local activity. Now, however, the duration of said waiver will be limited to a two-year period (article 120) and penalties are provided for in case of violation of the above mentioned obligation: deletion of the branch from the companies register (article 120 § 3 and 4) and criminal sanctions applicable to the managers of the foreign company or to the foreign natural person (article 891-2). Such amendments will have concrete implications, as the obligation set forth in article 120 of the Uniform Act Relating to Companies is so often violated or circumvented in practice;

In practice, the conversion of a local branch into a subsidiary can be implemented through:

- (i) a contribution of the branch’s assets and commitments in consideration for a capital increase in the company benefiting from the contribution or
- (ii) a sale of the branch’s assets pursuant to which a preexisting or newly registered local company acquires the assets and pays the corresponding price or records a debt of the same amount.

Obviously, this operation will in principle have to be carried out on the basis of the actual value of the transferred assets, which—in some cases, and especially when the existing branch has benefitted from renewed derogations during a period that can go up to several decades—will lead to the crystallization of capital gains which had remained unrealized until then.

In theory, any derecognition of a branch’s asset must be carried out at its actual value, mechanically triggering from an accounting standpoint the recording of extraordinary income in the amount of the capital gain regardless of the terms of its derecognition.

In other words, the transfer of assets will give rise to the calculation of capital gains by the difference between the actual value of the assets on the one hand, and their acquisition cost in the branch’s tax balance sheet, with the risk of corporate income tax being applied to this gain.

The tax cost of the operation could thus be very significant, even if in some cases, tax law authorizes taxing these capital gains at a reduced rate in the context of the so-called long-term regime. Therefore, it will be necessary to check the tax regulations specific to each country and to seek the application of tax neutrality mechanisms such as the favorable regime for mergers, to ensure that the investor is able to comply with these conditions. One could even contemplate contacting the tax authorities to obtain an express validation of the favorable regime sought.

Naturally in regulated sectors such as oil and mines, these provisions will have to be combined with the tax terms of the oil contracts and mining agreements.

On the other hand, when deferrable tax losses are available, it might be more advantageous tax-wise to set off the transfer gains against these losses, therefore avoiding the cash out corresponding to corporate income tax while optimizing for the future the depreciation of revalued tangible fixed assets. This being said, the most significant unrealized capital gains generally concern intangible fixed assets (non-depreciable) rather than tangible fixed assets. This does not render the revaluation of these fixed assets irrelevant, as it will reduce the tax cost of their future sale.

In addition to the risk of taxation of unrealized capital gains, there is also the risk of transfer taxes being applied to the taxable actual value of the transferred assets: real estate assets or assets belonging to the going concern. Again, an appropriate structuring and use of favorable tax regimes when they are available will lighten the tax cost of the operation.

Moreover, the tax regime of a subsidiary should be revisited in light of the relevant tax rules, particularly relating to the distribution of profits (i.e. comparison between the tax on the income deemed distributed by a branch and the withholding tax on dividends, which would be applicable as the case may be). The following will also apply according to different conditions: transfer pricing regulation, thin-capitalization restrictions and withholding taxes. The new entity may benefit, as the case may be, from the tax treaties intended to avoid double taxation.

  • The legal recognition and the definition of a representative or liaison office (“bureau de représentation ou de liaison”) (articles 120-1 to 120-5);
  • The possibility to appoint temporary management when the normal functioning of the company is no longer possible (articles 160-1 to 160-8);
  • The possibility to distribute interim dividends (articles 143 and 756);
  • The possibility to make contributions in the form of services (“apports en industrie”) in the different types of companies, except in SA (articles 50-1 to 50-4 and 389);
  • The possibility to set up companies with variable capital (articles 269-1 to 269-7);
  • With regard to public offering (articles 81 and seq.), the notion of offer to the public (“offre au public”) has been widened, the notion of qualified investor (“investisseur qualifié”) has been introduced and new provisions have been added concerning an SA calling for public capital (articles 827-1 to 827-12);
  • With regard to an SA, the nominal amount of the shares can now be freely determined by the articles of association (article 387), and the revised Uniform Act Relating to Companies no longer requires ownership of shares by the members of the Board of Directors (article 416), although the articles of association can impose such a condition (article 417);
  • The regime applicable to regulated agreements is modified, notably regarding an SA, by broadening the scope of the regulated agreements to agreements entered into with shareholders holding 10 percent of the share capital of the company at stake, even in the absence of common management (article 438);
  • The revised Uniform Act Relating to Companies provides for the possibility to use electronic communications under certain conditions: video conferences for shareholders meetings and email for shareholders’ convocations;
  • The reference to national provisions in some articles (regarding the use of notaries when signing or amending articles of association - article 10, article 395; the share capital amount in a SARL - article 311; the form of the acknowledgment of payment and deposit of funds in a SARL - article 314) tends to reduce and simplify the formalities (notably by reducing the role of notaries), while simultaneously affecting the “uniform” nature of the applicable law and makes knowledge of national law provisions applicable in addition to OHADA law even more essential.

Finally, it must be noted that existing companies and groups benefit from a two-year period - starting from the entry into force of the revised Uniform Act Relating to Companies - to update their articles of association.

This major revision of the Uniform Act Relating to Companies will have an impact both on the functioning of existing companies and entities (convening and holding of meetings’ modalities, express recognition of the validity of shareholders’ agreements which should increase the conclusion of such agreements, discussion of the advantages offered by transformation into SAS, etc.) and on the establishment of new entities which can now be achieved through more sophisticated legal and financial schemes. Thus the possibilities now offered by the Uniform Act Relating to Companies will not only support but also boost the economic development of the OHADA zone.