The Democratic Republic of Congo joins OHADA

In a long-awaited and favourable development, the DRC has formally adhered to OHADA, the pan-African organisation for the harmonisation of business law in Africa. The relevant enabling legislation was adopted in the DRC in February 2010. After a hiatus, the signature of the instruments for ratification by President Joseph Kabila was announced on 27 June 2012. The formal deposit of the instruments with the government of Senegal (which is the official depositary government pursuant to the OHADA Treaty) was made on 13 July 2012. The OHADA Treaty and the Uniform Acts promulgated thereunder will come into force in the DRC on 12 September 2012, i.e., 60 days following deposit of the instruments of ratification; Transitional rules discussed below may in practice delay full implementation in certain areas.

Created by treaty signed on 17 October 1993 in Port-Louis (Mauritius), OHADA is a pan-African organisation the purpose of which is to promote regional integration and economic growth and to ensure a secure legal environment through the harmonisation of business law in the OHADA region. OHADA already counts among its member states sixteen sub-Saharan African countries (Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Comoros, Congo (Republic-Brazzaville), Côte d’Ivoire, Equatorial Guinea, Gabon, Guinea, Guinea-Bissau, Mali, Niger, Senegal and Togo).

To achieve its aims OHADA has promulgated a number of Uniform Acts which, upon a member state’s adhesion, are directly applicable in such state. They override any local or national laws, whether promulgated prior or subsequent to such adhesion. The current OHADA Uniform Acts deal with the core area of business law, covering general commercial law, commercial companies and economic interest groupings, security interests in tangible and intangible real and personal assets, simplified procedures for recovery of debt and enforcement measures, insolvency, arbitration, accounting law and carriage of goods by road.

The OHADA treaty also created specific supranational institutions, including the “Cour Commune de Justice et d'Arbitrage” (Common Court of Justice and Arbitration, CCJA) located in Abidjan (Côte d’Ivoire). The CCJA is vested with judicial powers, and has authority to rule on substantive matters. Its decisions are binding on national courts. It also has advisory powers to ensure the consistent interpretation and uniform implementation of the OHADA legislation. It is the only Supreme Court which is also an arbitration centre.

The adherence of the DRC to OHADA will present considerable opportunities – as well as some challenges – to companies doing business in the OHADA.

Investors into the DRC will undoubtedly find the implementation of the Uniform Act on Commercial Companies and Economic Interest Groupings (the AUSGIE, from the acronym formed by its French name) a welcome development. The current DRC legal framework relating to commercial companies stems from disparate legislation originally dating back to the colonial era (in some respects going as far back as 1887). In a few cases it contains historical anomalies ill suited to modern business practices. For example the DRC decree-law of 22 June 1926, as subsequently amended, still requires specific Presidential approval for the formation and changes in the shareholdings in sociétés par actions à responsabilité limitée (joint stock limited liability companies). It also provides that such société par actions à responsabilité limitée may not have less than seven shareholders. It limits the voting rights attached to shares, so that regardless of the number of shares held by a shareholder, its voting rights may never exceed 20% of the total voting rights attached to the total number of shares or 40% of the voting rights attached to the shares held by the relevant shareholder. By way of contrast, the AUSGIE is a modern piece of legislation which, at the time of its promulgation (1997), reflected the most recent trends in continental European (particularly French) company law. Consideration is currently being given to updating the AUSGIE.

Joint ventures

The DRC enjoys considerable natural resources and much foreign investment to date has taken the form of joint ventures concluded either with other foreign investors or with DRC shareholders (often public sector entities) in the natural resource sector. The management and administration of such joint ventures often requires delicate negotiation between shareholders in order to ensure a proper balance is achieved between control of direction and strategy, voting rights and rights to dividends. While the DRC has already adopted a series of progressive and modern codes relating to various industrial sectors (e.g., a Mining Code, a Forestry Code and an Investments Code) which have succeeded in making those sectors attractive to international investors, existing company law makes it difficult for parties to joint ventures to enshrine certain controls (particularly shareholder control over management) desirable for safeguarding their interests. Joint venture parties have had to introduce these controls through private joint venture agreements which do not always fit well into the legislative framework and which raise issues of enforceability as against the joint venture entity itself.

The implementation of AUSGIE will make it easier for joint venture shareholders to conclude such arrangements in a manner consistent with the legislation to which the joint venture company itself is subject, rendering such arrangements enforceable against the company and against third parties. In the future these arrangements may be incorporated in the joint venture company’s own Articles of Association (statuts) which are filed with the local commercial registry and are a matter of public record.

Main forms of commercial companies

The AUSGIE creates two forms of companies, the société à responsabilité limitée or SARL (limited liability company), and the société anonyme or SA (joint stock company) which are the equivalents of company forms well known throughout continental Europe. This will enable joint venture partners to negotiate arrangements within a familiar framework. Subject to certain limitations, parties are free to create different categories of shares with diverse voting and dividend rights, and enjoy a certain measure of freedom in determining how management of the company is to be performed.

The OHADA SARL does not have a board of directors and management is exercised by one or several managing directors (gérants), subject to certain decisions which as a matter of law can be made only by shareholders. The challenge for investors using this form of company is ensuring that certain strategic acts are not decided upon without due consideration being given to the views of the shareholders. This can be a subtle process given that as a matter of law, the gérant is fully entitled to represent the company vis-à-vis third parties unless such third parties have actual notice of any requirement for shareholder approval (and the mere fact that statuts are a matter of public record does not suffice to put such third parties on notice).

The OHADA SA by contrast normally has both a board of directors (conseil d’administration) and management consisting either of a single Chairman and Chief Executive Officer (Président-Directeur Général) or, at the option of the shareholders, a separate Chairman of the Board (Président) and Chief Executive Officer (Directeur Général), both of whom are designated by the Board. This allows for a bifurcation of power and control particularly well suited to joint ventures concluded between foreign investors concerned more with long-term strategic decisions and local parties who may be better suited to deal with the day-to-day management of the company. Alternatively, in companies with less than three shareholders, it is possible to opt for management by a single managing director (administrateur général) much along the lines of an SARL; this form of management can be particularly useful in the case of wholly-owned subsidiaries. Indeed, the single shareholder SA is also specifically authorised under AUSGIE and will certainly be an improvement on the seven shareholder société par actions à responsabilité limitée (or SARL) currently used in the DRC.

It is noteworthy that, to avoid the overly burdensome regime for SARLs provided by the DRC law as described above, most DRC companies chose to be incorporated as a société privée à responsabilité limitée (or SPRL), and chose this despite the fact that the SPRL form was initially tailored for privately held or closed companies (such as family-owned businesses). As a consequence of the implementation of the OHADA law, DRC companies will be required to bring their constitutional documents (statuts) into line with the rules governing the relevant corresponding OHADA type of company. This implies in theory that a company established as a SPRL would opt for the OHADA SARL form, which provides for the most comparable and similar regime. However, it may be advisable for certain businesses that are incorporated “by default” as SPRLs to take one step further by ultimately converting into an OHADA SA (the typical open capital company), which is in practice likely to be the most suitable form to conduct their business.

Corporate governance

AUSGIE and other Uniform Acts which will come into force in the DRC in September could also present a series of challenges to foreign investors which will need to be considered closely by them in conjunction with their international and local legal and financial advisors. Limitations on the number of offices directors or officers may hold simultaneously in different companies could make it more difficult to source local talent in order to staff such positions. Detailed criteria have been established with respect to the holding of meetings of shareholders and (where relevant) the Board of Directors and although considerable latitude is provided for the mechanics thereof to be decided in the statuts of the company, it still appears necessary for an actual meeting to take place in certain circumstances. This will mean that the adoption of resolutions by simple signature of unanimous “actions in writing” by members of management located in disparate places will not be possible. Certain “interested party” transactions concluded between an SA and members of its management or Board of Directors (or with other companies in which such managers or directors are also interested) are either prohibited outright or (unless they are routine transactions concluded at arms’ length) are subject to prior approval by the Board of the SA (with the “interested” directors required to abstain). This restriction can render the process of concluding intra-group transactions complex. It is hoped that several of these issues will be dealt with in the modifications to AUSGIE currently under consideration.

Accounting and auditing

Similarly, other modifications to the legislative framework will present both incentives and challenges to investors. All SA companies and certain SARL companies meeting certain thresholds as to share capital, total annual turnover or levels of employment, are required to designate official statutory auditors (commissaires aux comptes) who review and certify the company’s accounts. This naturally provides a safeguard against irregularities in the accounts (and all of the major international accounting firms maintain offices in several OHADA member states) but it also grants such auditors power to trigger “alert proceedings” requiring management to respond to queries in the event of financial difficulties. The OHADA Uniform Act on Accounting Law (AUL) creates a comprehensive framework for accounting rules and procedures but these may be different from the international accounting standards used by major international companies. One such rule requires the alignment of a company’s financial year with the calendar year and imposes an obligation to close annual accounts on 31 December.

Insolvency

The OHADA Uniform Act on Insolvency Proceedings also provides a comprehensive framework not only for companies encountering financial difficulties and seeking relief from the pressing demands of creditors, but also for creditors to file their claims.

Transition

The changes to DRC law wrought by adhesion to OHADA are as significant as they are welcome, and are likely to require adjustments to the articles of association of most existing DRC companies. For this reason, the AUSGIE provides a transition period of two years for companies to modify their articles of association in order to bring them into line with the AUSGIE. The existing articles of association will continue to apply to such companies until they are so modified, but after the two-year period, i.e. from 12 September 2014, any provision of the articles of association of any company that have not been modified so as to render them compliant with AUSGIE will be considered as inapplicable and will be replaced by the relevant AUSGIE provisions. However uncertainty exists as to the entry into force of other provisions such as for instance the AUL, which upon its adoption on 24 March 2000 provided for a one to two years transitional period, but contains no transitional regime for companies in jurisdictions that become subject to the AUL thereafter. In light of the above, investors in the DRC should consider at an early stage which position to adapt with regard to the compliance of existing commercial companies with OHADA law.

Banks and other financial institutions providing credit either to DRC entities or to their shareholders are certainly among the most significant beneficiaries of the adhesion by the DRC to OHADA. The Uniform OHADA Act on Security Interests (AUS), which was originally adopted in 1998 but was completely overhauled in 2010, provides a comprehensive legislative framework for the creation, administration and enforcement of security interests over real and personal tangible and intangible assets located in any OHADA member state and granted to secure financing made available to such entities. Specific regimes are provided for security over tangible moveable assets such as inventory/stock-in-trade, intangible assets such as receivables and bank account balances, company shares, “going concerns” (fonds de commerce, a “bundle of assets” used by a commercial company to satisfy its clientele, including business equipment, intellectual property rights, leasehold rights and customer goodwill) and mortgages over real property.

Existing security interests will continue to be governed by the applicable DRC law, whereas the AUS will only apply to securities constituted after its entry into force. As far as the latter are concerned, the AUS is likely to provide financiers with the following advantages:

• Security interests such as pledges over bank account balances, share pledges (see below), and pledges over intellectual property rights are used in the DRC in practice. To this date, there has been no specific law governing their constitution and implementation as the DRC law n°73-021 of 20 July 1973 only established a general regime for securities that did not address the specific features of each of these pledges.
• Pledges over “going concern” (gage sur fonds de commerce) are currently governed by the DRC decree-law of 19 January 1960 and can only be granted to an entity registered in the DRC as a financial institution. Even though the pledge over “going concern” is, in practice, one of the few DRC security interests that can be made public – and thus enforceable against third parties - it is, because of this restriction, not available to many creditors. The AUS does not provide any such limitation and, in any event, provides for numerous other categories of security interests that can be published and are thereby enforceable against third parties.
• Where the pledged asset is a sum of cash or an asset that is quoted on an official exchange, or, in the case of any other tangible assets (except in the case of the business pledge), where the debtor is a professional, the parties may provide that the creditor may enforce the pledge by self-appropriation of the secured asset so long as the value of the asset at the date of the appropriation is evaluated by an expert (who can be designated mutually by the parties or designated by the court), with any surplus value being returned to the pledgor. This is certainly an important modification, as it will permit enforcement of security interests without time consuming and potentially expensive court procedures.
• Pledges of shares are commonly used under existing DRC legislation and will continue to be possible under the OHADA AUS. However, it will henceforth also be possible to pledge “accounts of financial instrument” (comptes de titres financiers), i.e., all of the securities and other financial instruments that are deposited from time to time in an account. Such security is created and perfected by a simple declaration of pledge signed and dated by the owner of the account in which the securities are deposited. This important change permits considerable flexibility in respect of security interests over financial instruments since the composition of the securities account may change over time and no filing with the Registry of Commerce is required to perfect the pledge. However, in practice it is limited for the moment to securities and other financial instruments which are dematerialised and can therefore be deposited in such an account.
• Finally, under the current DRC regime, because of the lack of a centralized registry office, only a few types of security could be made public and opposable to third parties. This created a certain level of insecurity for creditors and financiers. The creation of a register of commerce (Registre du Commerce et du Crédit Mobilier or RCCM) should rectify this problem, particularly as plans are underway within OHADA to permit computerised access to filings at the Registry of Commerce, enabling creditors to determine more easily the current situation of security filed against a debtor.

These changes will permit financiers to lend on a secured basis with considerable legal protection. Naturally, there will still be some hurdles to overcome, as the Registry of Commerce is yet to be implemented and operational and as old methods of taking security will need to be foregone to make way for the new regime.

Many international parties will prefer to resolve commercial disputes by international arbitration conducted under the auspices of the International Chamber of Commerce rules or those of a similar body, and to conduct the actual arbitration proceedings in some neutral jurisdiction. In the case of disputes arising out of investments in the DRC, this has been somewhat stymied because the DRC has not signed or ratified the New York Convention on the Recognition and Enforcement of Arbitral Awards, under which arbitral awards granted in one signatory state are enforceable in other signatory states (this is also the case for several other African countries, including OHADA members such as Chad, Congo (Brazzaville), Equatorial Guinea, Guinea Bissau and Togo).

The two main consequences of the DRC's adhesion to OHADA with regards to dispute resolution are (i) that the Uniform Act on Arbitration (AUA), which sets out arbitration procedures, will become immediately applicable to any arbitration arising after its entry into force where the seat of that arbitration is within an OHADA member state, and will override any inconsitent existing arbitration rules of such state, and (ii) that it will be possible to submit disputes to the CCJA as an arbitration centre in accordance with the rules of the OHADA Treaty and the OHADA Arbitration Regulations.

Arbitration procedures in accordance with the AUA

Based on the UNICITRAL Model Arbitration Law, the AUA provides for expeditious and confidential resolution of disputes by specialist arbitrators. Arbitral awards made in any of the OHADA member states are enforceable in each of the other OHADA member states, subject to the granting of an execution judgement (exequatur) by the court of the state in which the award is sought to be enforced. This will generally be granted unless the award is manifestly contrary to public policy in that state. Decisions granting or refusing the grant of such an execution judgment can be appealed to the CCJA.

Arbitration under the auspices of the CCJA

The parties to a contract may choose to submit their dispute to the CCJA provided at least one of them is domiciled in an OHADA member state, or the relevant contract provides for its partial or entire execution within one or several OHADA member state(s). In this case, the seat of the arbitration must not necessarily be located within an OHADA member state. When acting as an arbitration centre the CCJA will for instance be in charge of appointing or revoking arbitrators and examining arbitration awards, and of verifying the compliance of the arbitration with the OHADA Arbitration Regulation. Arbitral awards rendered accordingly are enforceable in any OHADA member state subject to the granting of an execution judgement by the CCJA which has sole competence in this matter.

Subject to a number of challenges which will need to be encountered and dealt with, the adhesion of the DRC to OHADA will provide investors, financiers and litigants with enhanced legal protection for the conduct of business. But it is only fair to note that the OHADA network of Uniform Acts, as comprehensive as it is, does not deal with all areas of concern to domestic and international investors.

Tax

OHADA does not attempt to deal with taxation regimes, and each member state is free to adopt its own tax legislation and regulations. Therefore, issues as crucial as company taxation, withholding tax on dividends and on interest on borrowings, and transfer pricing will be dealt with differently in each member state as a consequence both of domestic legislation and international tax treaties, all of which will need to be examined closely by investors and their advisers.

Contract law

Attempts to unify contract law within the OHADA area resulted in the preparation of a draft OHADA Uniform Act on contracts in concert with UNIDROIT, but this has not been promulgated at the present time. Therefore, investors will need to look at the local civil code and/or code of obligations, both in the DRC and other OHADA member states, to resolve certain issues of execution, performance and interpretation of contracts.

Labour and employment law

Efforts at promulgating OHADA-wide legislation on labour and employment issues, as well as social security matters, have also not borne fruit for the moment.

Monetary policy and exchange controls

Most, but not all, OHADA Member States are members either of the West or Central African Monetary Union. They are therefore subject to comprehensive rules on monetary policy, exchange controls (including the ability to borrow and reimburse borrowings abroad and to transfer funds outside of the home jurisdiction) and a common currency which applies throughout the union of which they are a member. These rules are enforced by the central bank of the relevant monetary union; this ensures a consistent monetary policy within the relevant monetary union. The DRC belongs to neither such union and therefore its regulations relating to these issues apply separately and require close scrutiny, particularly by foreign investors concerned with repatriating dividends.

The adhesion of the DRC to OHADA is a significant step that will bring the DRC into legal harmony with several other French-speaking sub-Saharan jurisdictions and is likely to bolster investor confidence greatly. Joint venture partners will find that it provides a framework for corporate structures familiar to anyone already doing business in Western Europe, while financiers will appreciate greatly the modern procedures for the creation, administration and enforcement of security interests. Parties to a commercial dispute are also likely to appreciate the confidential and impartial procedures provided for in OHADA arbitration law.

The adhesion of the DRC to OHADA will also present parties with challenges which will need to be surmounted. Commercial companies already doing business in the DRC will need to revamp their corporate documentation and may be required to designate statutory auditors. Bankers and other financiers will need to become accustomed to the OHADA framework for security interests, while recognising that monetary and financial policy will continue to differ from that of other OHADA member states. Everyone will need to bear in mind differences in labour law, taxation and contract law that are not resolved by OHADA.

We have considerable experience both in the DRC and other OHADA jurisdictions, and are able to assist you in conducting your business in the OHADA-compliant DRC.