Contributed By Raphaël & Associés
The main type of companies that can be formed, under the Lebanese law, are:
Lebanese law does not have a general limitation to foreign interest in companies. However, a third of the members of a board of directors of a joint stock company must be Lebanese and every company duly incorporated in Lebanon must have a head office in Lebanon and is considered as a Lebanese company.
There are exceptions to the absence of limitations regarding foreigners owning shares in Lebanese companies linked to the company's activities:
Joint-stock companies issue regular shares entitling the shareholder in particular to vote in the general assemblies, to participate to capital, to receive dividends increases and to dispose of his or her shares. Joint-stock companies may also, since the amendment of the Commercial Code, issue non-voting preferred shares with specific rights, financial benefits and/or other priority rights.
Shareholders owning preferred shares enjoy the same rights as regular shareholders, with the following differences:
The Lebanese Commercial Code is the primary source of law and regulations relevant to shareholders' rights. Lately, Law No 126 dated 1 April 2019, which entered into force on 1 July 2019, introduced several major amendments to the code. In the case of a vacuum, the Civil Code (Code des Obligations et des Contrats) applies.
Shareholders of a company are all equal in rights and obligations and, in general, have the right to:
Shareholders' rights may vary in accordance with the type of shares (Regular or Preferred) they own as per the company’s articles of associations or as per a resolution of an extraordinary general assembly of the shareholders amending those articles of associations.
Furthermore, a number of companies have created different categories of regular shares for specific purposes. For instance, to have board members chosen within each of the created categories or to have reserved matters subjected to the approval of each of the created categories.
However, the validity of such arrangements is subject to maintaining some freedom to the general assembly in electing the board members and not changing, in fine, the rules set in the law of the required majority to pass a resolution in the general assembly.
These agreements are common in Lebanon, especially with respect to joint-stock companies. Nevertheless, they cannot contravene mandatory rules. The validity of a number of common clauses is still questionable (ie, as clauses related to the appointment of board members or related to the increase of the required majorities or quorum in the general assemblies). Furthermore, the effectiveness of such agreements is somewhat limited. A breach of a shareholders' agreement often results in compensation and rarely in the enforcement of the agreement (ie, forcing a shareholder to vote in a specific way).
Shareholders owning 10% of a joint-stock company or more may request the court to appoint an external auditor
Shareholders owning 20% of a joint-stock company or more may request the auditors of a joint-stock company to call for a meeting of the general assembly of shareholders.
Shareholders owning 20% of a limited liability company or more may request the court to appoint an external auditor.
Shareholders owning 25% of a limited liability company may request the court to appoint a third party in charge of calling for a meeting of the general assembly of directors, only in the event that the general manager and/or any of the company’s directors and/or the auditor fail to do so.
A holding company can only finance its subsidiaries in which it owns at least 20%.
Otherwise, the majority of more than half of the shares makes all decisions except for any resolution related to the amendment of the articles of incorporation of the company, which requires a reinforced majority.
Shareholders are allowed, prior to the general assembly set to approve the company’s accounts, to access to the following documents:
Although shareholders have access to financial reports of the company, they do not have access to the day-to-day activity and operations. This aims to protect the company’s independence from its shareholders.
The following matters request the prior approval of the general assemblies of shareholders:
Calling a meeting is the prerogative of the board of directors. However, shareholders owning 20% of the company’s shares may be entitled to call for general assemblies.
Shareholders must be notified at least 15 days prior to the date of the meeting of the general assembly, unless the by-laws provide for a longer period.
Shareholders are generally notified by letters addressed to them and/or by announcements published in local newspapers and the official gazette.
Shareholders have the right to review the company’s financial statements and should be provided, at least 15 days prior to a meeting, with copies of:
Voting and quorum requirements are as follows:
a) In order to hold an ordinary general assembly of shareholders legally, the presence of shareholders representing a minimum of the third of the company’s share capital is required. If such a quorum is not justified, the general assembly meeting shall be adjourned and a second meeting shall be convened. At the second meeting no minimum quorum is required.
Unless otherwise specified by law or in the company’s articles of association, in order to be legally adopted, the resolutions of the ordinary general assembly must be voted for by at least the majority of the shares present or represented.
b) In order to hold an extraordinary general assembly of shareholders legally, the presence of shareholders representing a minimum of the two thirds of the company’s share capital is required. If such a quorum is not justified, the general assembly meeting shall be adjourned and a second meeting shall be convened. For the second meeting, the quorum requirement is lowered to shareholders representing half of the company’s capital. If the quorum is still not met, the meeting shall be adjourned and a new meeting convened. For the third meeting, the quorum requirements are lowered to shareholders representing one third of the company’s capital.
The change of the object of the company or of the form of the company may only be resolved by an extraordinary general assembly of shareholders with a minimum quorum of shareholders holding and/or representing at least 75% of the company’s capital is required.
Unless otherwise specified by law or in the company’s by-laws, in order to be legally adopted, the resolutions of the extraordinary general assembly must be voted for by the shareholders, present or represented at the meeting, holding at least two thirds of the company’s capital.
The general assembly can only discuss and resolve matters included in the agenda of the meeting as set by the board of directors. However, the general assembly can discuss and resolve unexpected and urgent matters that may arise in the course of a meeting.
Prior to 1 July 2019, only shareholders of a company were allowed to be appointed as board members of the company. However, since Law 126 was passed, any person or entity can be appointed as members of the board of directors whether they are shareholders or not.
Pursuant to Article 150 of the Commercial Code “administrators can be removed ad nutum”. The general assembly of shareholders is entitled to appoint or dismiss the board members and any such entitlement may not be restricted.
However, if a board member is dismissed from their position during a meeting of the general assembly of the shareholders, without the matter being included in the agenda of the meeting, the resolution shall not be effective until it is confirmed by a second meeting called specifically to discuss and vote on that matter. This second general assembly must be convened by the auditor of the company within two months from the date of the meeting during which the director was dismissed.
In principle, shareholders cannot challenge directly a decision adopted by the board of directors; however, they can vote freely, at a general meeting of the company, on a resolution dismissing and appointing board members, which translates into indirect control over the decisions the board can take.
Pursuant to Article 172 as amended by Law No 126, it is the general assembly of shareholders that appoints or dismisses the auditors. Therefore, only the shareholders have the right to do so through a resolution adopted by the general assembly.
Each company must file with the Ministry of Finance a list of the shareholders and the shares that each one of them owns in the company.
Shareholders are required to disclose and pay taxes on any dividends received from the company. The companies withhold the tax due at the date of distribution.
Since the decision of the Ministry of Finance dated 27 September 2018 No 1472, each company must declare to the Ministry of Finance, each year, the names of the beneficiary owners of shares representing a minimum of 20% of company’s total share capital. In addition, pursuant to Law No 106 dated 13 November 2018, each company must declare to the Ministry of Finance each year the names of the shareholders and the beneficiary owners of the company’s shares.
Due to a new regulation, beneficial owners must also be disclosed to the register of commerce.
Shareholders are free to dispose of their shares as they deem fit and they are entitled to grant security interests over their shares. However, any such security must be notified to the company and to the register of commerce.
The transfer of shares of joint-stock companies is unrestricted unless the articles of incorporation provide for a pre-emption right. In limited liability companies, the other partners are granted, by law, a pre-emptive right.
Partners in a limited liability company must obtain the approval of the company before disposing of their shares. The company has a pre-emptive right to acquire the shares on the same transfer conditions contemplated. In the event that the company forfeits this right, the non-selling partners have a pre-emptive right to acquire the shares on the same conditions. Only if the company and the other partners refrain from exercising their right pre-emptively will the partner be entitled to sell his or her shares to a third party.
Contractual requirements or restrictions can be created between shareholders, in a joint-stock company, through shareholders' agreements. Any such restrictions or requirements are enforceable provided that a restriction on the disposition of shares in joint-stock companies is subject to the condition that the right of a shareholder to sell his or her shares is not materially impaired (ie, one may provide a pre-emption right or a limited lock-up period but may not forbid the shareholder to sell his or her shares).
If the company becomes insolvent, the shareholders are entitled, pro rata to their holding, to the liquidation 'in bonis' proceeds of the company after the settlement of all liabilities.
The shareholders can also resolve to liquidate the company through a resolution of the extraordinary general assembly.
Furthermore, in the event that a joint-stock company suffers losses exceeding three quarters of its capital, the board of directors must call for a meeting of an extraordinary general assembly of the shareholders in order to adopt any appropriate measure, which may include an early liquidation of the company. If an extraordinary general assembly is not convened, for whatever reason, any shareholder has the right to present this matter before the competent courts. A limited liability company which loses three quarters of its capital is under an obligation to reduce its capital.
Shareholders can express their concerns only during the general assembly meetings and may vote each according to their will. The shareholders do not have access to the day-to-day activity and operations of the company.
This does not preclude any unsatisfied shareholder from bringing any claim against the company or the board or the management regarding any disputed matter.
In addition to what is stated above, it is important to note that companies in Lebanon are mainly family companies and lawsuits are rarely publicised. Often, the lawsuits are brought by minority shareholders against the company or the shareholders in relation to the abusive actions of the majority shareholders.
Although no official statistics are available, it is our belief that the aim of the majority of the lawsuits filed by minority shareholders is to cancel resolutions adopted by the majority shareholders or to challenge the company’s accounts. Sometimes, the lawsuit underlies the wish of minority shareholders to force the majority shareholders to buy them out. Therefore, in such cases claimants are able to slow down the proceedings to delay the issuance of a judgment in order to complicate the general course of the company.
Other disputes are sometimes brought by shareholders against the company when the company authorises specific transactions that are for the benefit of certain shareholders. These lawsuits are brought with the aim of cancelling such authorisations and/or to ask for compensation.
The claims filed are generally claims filed by minority shareholders against majority shareholders independently of the sector or the business of the company.
This distinction is not applicable in Lebanon. The companies are mainly family-owned.
Public activist demands do not apply in Lebanon.
Other than defending their positions, companies may sometimes advise the other shareholders to buy the stake of the unsatisfied shareholder.
Lebanese law recognises the separate legal personality of a company as distinct from its shareholders.
Legal remedies against the company are as stated above.
In the event that a shareholder is abusing his position by means of his controlling stake and is influencing the company into a decision that is against the company’s best interest, any shareholder may approach the competent court and request that the resolution passed be reversed for the best interest of the company.
The courts have come a long way in interpreting the rights of the minority shareholders and have found that there is no need for the minority shareholders to prove a damage they have suffered. They only need to prove that the resolution adopted is against the general interest of the company.
A shareholder may claim for damages on behalf of the company if the damages are not suffered by the shareholder alone but by the company as a whole, or may claim for damages on his or her own behalf if he or she suffered a specific damage independent from the damage suffered by the company.
The directors of a company can be held liable against any fraud or violation of the law or the by-laws. Any third party who suffers a damage can seek remedies from the directors on a personal basis, irrespective of any discharge granted by the general assembly.
The directors can also be held liable for their managerial misconduct. It is generally up to the company to seek legal remedies. In the event it fails to do so, each shareholder can seek a compensation from the courts up to his stake ownership in the company.
The directors can also be held liable by the shareholders for any direct damage they cause to a shareholder as a result of their managerial misconduct.
The directors can also be held liable for any related party's transaction that they engage in without securing the prior approvals of the general assembly of shareholders.
Furthermore, pursuant to Article 253-1 of the newly enacted law No 126, the directors of a company can be held liable when they willingly and in bad faith cause a damage to the company by:
While voting is the most important right granted to a shareholder, the latter should not abuse his or her right against the general interest of the company and of the remaining shareholders. In this context, there are two types of abuses:
Pursuant to Article 253-2 of the Commercial Code as amended by the newly enacted Law No 126, auditors can be held liable if they prepare or sign off a false financial statement.
Other than as explained above, the shareholders cannot bring derivative actions on behalf of the company.
As in any litigation, the shareholders usually evaluate the strength of the legal grounds of their claims, the length of the proceedings and its cost and the possibility to enforce the judgments against their opponents.