Bearer shares translation article
Bearer shares_ law no. 76.2016
Author name: Honorary Judge Mohamad Hamade
THE HONORARY GOVERNMENT COMMISSIONER
TO THE STATE SHURA COUNCIL, RETIRED JUDGE
MOHAMAD HAMADEH
Opinion
On the implementation of the legal rules as stipulated in law # 75 dated 27/10/2016 published in the Official Gazette in No. 52 dated 03/11/2016,
Given upon the request of the Lebanese Arab Company for Mineral Drinking Water
(Sabil) s.a.l
Introduction
First of all, it is worth noting that according to the applicable provisions of the Code of Commerce regarding the right of joint stock companies, including partnerships limited by shares, to issue shares prior to the entry into force of the law subject-matter of this opinion, such companies were entitled, pursuant to articles 103, 104 and 352 / Commerce, to issue 3 types of shares: nominal shares, shares to order or bearer shares..
A right in rem arises out of the issuance of such shares for their holders; it consists in their direct legal authority upon such shares and therefore, they are able to exercise their rights without the interference of another person, such as the right to transfer, mortgage and disposal. Personal rights for them also arise out of said issuance; they consist in the legal bond between them and the company that issued the shares, such as the right to dividends, the right to recover their value and the right to vote in General Assembly.
According to the Code of Commerce, such shares of all 3 types shall remain nominal until fully paid, i.e. until all of their value is paid on the dates determined by the company’s statute, without preventing them from being traded prior to the completion of such payment (Article 119 thereof). This aims to keep them under the Board of Directors’ control pursuant to the provisions of both articles 455 and 456 thereof by making the transfer of their ownership and their trading subject to registration in the company’s records..
After the value of shares of all types is fully paid, their trading and transfer shall differ according to the type of share; bearer shares shall be physically delivered, shares to order shall be endorsed, and nominal shares shall be registered in the company’s records (see the text of both above-mentioned articles 455 and 456).
In light of the preceding provisions, the owner of a bearer share or a share to order- as a holder of a right in rem according to his direct authority on the shares belonging to him – might find it difficult, in the event he loses possession of the share through theft or loss, to track the same and regain possession thereof from any possible possessor given the nature of transfer and trading of the share that does not require registration in the company’s records. It would also be difficult because claiming the recovery of possession might collide with the rule that “possession of movables entails ownership thereof” given that shares are considered as tangible movables..
On the social level, bearer shares or shares to order actually pose a threat; they are used as a means for tax evasion purposes and especially the inheritance tax. They could also be used with the aim of internally invading the company that issued them by another competitor company by means of taking possession of a large part of shares prior to the General Assembly’s meeting, thus achieving a fake majority when resolutions are taken.
Considering such risk factors and threats associated with the transfer of bearer shares and shares to order, we see that the legislator – by issuing the law subject -matter of this opinion, which cancels, as per its title, the right of joint stock companies and partnerships limited by shares to issue such shares and prohibits trading in issued shares prior to its entry into force – sought to empower the State to practice its supervisory and fiscal role regarding the transfer and trading of shares with the State entering such companies on a wide scale and this, by confining the right to issue and trade shares to nominal shares solely since their transfer is made by means of registration in the company’s records as per the commercial legal rules in force.
On the new legal rules mentioned in law # 75/2016 First: On the issuance of new shares
Pursuant to the cancellation by the law, based on its title, of bearer shares and shares to order, the law prohibited – in clause ‘first’ of its sole article – joint stock companies and partnerships limited by shares to issue such shares as from the date of its entry into force and the date whereby its provisions become effective when published in the Gazette
No. 52 dated 03/11/2016, as opposed to any other text. Therefore, the date of enforcement of the new law’s provisions shall be the borderline between the coming into force of its provisions and the end of validity of the Code of Commerce’s provisions with regards to cancelled shares.
First: On the issuance of new shares
The new law # 75/2016 – by canceling bearer shares and shares to order as from the date of its entry into force (clause ‘sixth’ thereof) – has drawn the line before holders of such shares preventing them from practicing the rights conferred to them by article 105 / Code of Commerce, and conditioned the restoration of practicing the same upon carrying out the process of substitution prior to the elapse of one year as from the date of its entry into force. Such rights which the new law prohibited them from practicing until the substitution is made are as follows:
- The right to dispose of such shares, in addition to transferring and trading them.– The right to attend General Assembly sessions for the companies that issued them, and the right to vote.
- The right to appoint members in said companies’ Boards of Directors.
- The right to dividends for the future after the date whereby the law came into force.
- The preferential right to subscription when raising capital.
- The right to participate in the company’s liquidation and in dividing its assets.
As for the rights of holders of cancelled shares as to their nominal value upon subscription, to dividends owed before the new law became effective, in addition to the right to ownership of such shares, the new law aimed to preserve such rights as being original or inherent rights in rem acquired by their holders prior to its entry into force. Therefore, the law organized their fate and legal status and included, in its provisions, relevant legal texts as per the following:
- Cancelled shares shall be substituted for nominal shares within a 1-year period asfrom the date of its entry into force. After the expiry of this period, the right to complete the process of substitution thereof is terminated because such process is a peremptory norm stipulated by the law and therefore, it should be completed within said deadline in order to regain the ability to practice rights related to cancelled shares, whether deriving from the ownership or personal rights towards the company that issued the shares or towards other persons (clause ‘first’ & ‘third’, paragraph 1 & 2).)
- The ownership of shares that were not substituted within said 1-year deadline shall be transferred – two years after the date of enforcement of the law – to the name of the Lebanese State. This is considered as a peremptory norm since it is associated with a right in rem: the right to ownership (paragraph 3 of clause ‘third’) that shall lapse upon the expiry of the 2-year period and shall be transferred to the State’s name.)
- The provisions of both articles 90 & 91 / Income Tax Law shall be applied to the rightsof holders of cancelled shares that were not substituted within the 1-year period, to dividends owed thereto annually before the new law became effective (clause ‘fourth’).
1) On the process of substituting cancelled shares and the fate of relevant rights
It appears from the provisions of the law subject-matter of this opinion, that it imposed on the companies that issued cancelled shares to substitute the same. The law also specified the procedures aimed at completing such process and the legal deadline for it along with the consequences resulting from its completion within the deadline and the ones that would ensue after the deadline’s expiration with no substitution being made. The law determined the foregoing according to the following:
- The companies that include bearer shares or shares to order should substitute suchshares issued prior to the entry into force of this law, for nominal shares as per the provisions of clause ‘third’, within a 1-year deadline as from the date whereby it became effective. Such companies should also amend their articles of association in conformity with the above-mentioned provisions within a deadline not exceeding the date whereby the first meeting of the General Assembly for shareholders convenes (paragraph 2 of clause ‘first’ of the law’s sole article).
Concerning the due procedures aimed at completing the process of substitution, the law provides the following:
- Joint Stock Companies that have already issued bearer shares or shares to ordershould notify the holders of such shares – through publication in the Official Gazette, in 3 local newspapers and on the company’s website if any – of the obligations as stipulated in clause ‘first’ (the cancellation of such shares and the obligation to substitute them within a 1-year deadline as from the date whereby the law became effective).).
Such companies should also obtain from the holder of such shares the name of the person that the substituted shares must be registered in his name in accordance with the provisions of clause ‘first’.
Pursuant to this obligation on the companies that issued cancelled shares, the law imposed on the companies failing to abide by the obligation of such notification a fine penalty equivalent to 50% of their capital value.
On the consequences resulting from carrying out the substitution or not
- By carrying out the process of substitution prior to the elapse of the 1-year deadline,holders of shares substituted for nominal shares shall regain their right to practice all rights related to their shares, which were suspended when the law became effective and until the process of substitution is completed during this deadline.
- The companies’ non-adherence to the obligation of said notification, and thereforebeing subject to a fine, shall have no impact, in any event, on the enforcement of the due cancellation by virtue of the law nor on the obligation of cancelled shares’ holders to substitute the same within the 1-year deadline nor on the entry into force of such deadline. Additionally, it shall have no impact on the creation of said shares holders’ right, as from the date of entry into force of the law, to request from the company that issued said shares to substitute them for nominal shares. In fact, when the law becomes effective starting from the date of publication thereof in the Official Gazette, its provisions shall be considered as applicable to all concerned parties thereto, whether they were informed about them or not. Hence, one should not give the pretext of not being aware in order to evade the implementation of its provisions, pursuant to the principle that “ignorantia juris non excusat”, thus there shall be no excuse for ignoring its provisions.
- The process of substitution by the companies that have already issued cancelledshares requires obtaining from such shareholders the name of the person that the alternative nominal shares must be registered in his name in his records.
- The prohibition to practice rights related to cancelled shares, which becomes finalupon the elapse of 1 year as from the entry into force of the law with no substitution being made, is based on considerations closely linked to the public interest with the aim of reaching a stable way of dealing with such shares that were not substituted yet cancelled. Therefore, the above-mentioned 1-year deadline shall be a termination deadline as it is fixed to use the right to substitute them for nominal shares under
penalty of termination of such right in the event of the deadline’s expiration and the termination of the right to practice rights related to the said shares.
- The legislator’s reiteration, in several provisions in the law, of the 1-year fixed deadlineto substitute cancelled shares as from the date of its entry into force, confirms that the process of substitution shall not be made after the expiration of such deadline given the latter’s nature that terminates the right to make such substitution and to practice rights related to cancelled shares other than the right to their ownership, and therefore, the right to their nominal value paid by their holders upon subscription, because the legislator laid down special provisions regarding such rights in paragraph 3 of clause ‘third’ as outlined hereinafter.
- The prohibition to practice rights related to cancelled shares – which became effectiveupon the entry into force of the law on the day it was published on 3/11/2016 “until said shares are substituted for nominal shares” as indicated in paragraph 1 of clause ‘third’ – does not imply that the 1-year deadline could be extended nor that the substitution could be made following its expiration given its effects that terminate the practice of said rights.
2) On the right to ownership of cancelled shares which were not substituted by their holders
Paragraph 3 of clause ‘third’ of law # 75/2016 stipulates that:
“The ownership of bearer shares and shares to order that were not substituted for nominal shares, shall be transferred, two years after the entry into force of this law, to the name of the Lebanese State.”
This text indicates the following:
- The right to ownership of cancelled shares that were not substituted within the 1-yeardeadline as from the date whereby the law became effective, shall be transferred automatically, two years after the entry into force of the law, to the Lebanese State. Therefore, the company that issued such shares shall have the obligation of transferring the ownership registration to the State’s name and registering the same also in its records for the purpose of acquiring the right to such registration by force of law following the transfer of ownership, by virtue of the registration, to its name..
- With the transfer of said ownership to the name of the State, the latter shall replacethe holders of cancelled shares in practicing all rights relating thereto..
- With the transfer of said ownership to the name of the State, the latter shall replacethe holders of cancelled shares in practicing all rights relating thereto.
- The right to the nominal value of cancelled shares that was paid upon subscriptionor the one that was paid subsequently on the dates specified by the company’s statute, shall be transferred to the State Treasury following the transfer of ownership to its name and the registration thereof in the company’s records and following the termination of the owners’ right thereto. Therefore, such right shall not be transferred to the companies that issued the same.
companies that issued the same.
- The law did not provide for the obligation to compensate holders of cancelled sharesfor the transfer of ownership to the State’s name, which brings up the constitutionality of the text in this regard and the compulsoriness of its provisions.
On the constitutionality of the text of paragraph 3 of clause ‘third’
Article 15 of the Lebanese constitution stipulates that:
“Ownership is protected by law; no one shall be deprived of his property unless for public interest purposes, in the cases provided for in the law and after being fairly compensated.”
The amended Article 19 thereof stipulates that:
“A Constitutional Council shall be established to monitor the constitutionality of laws and to rule over disputes and appeals arising out of the presidential and parliamentary elections …
Council regulations and norms as well as the means to constitute and review it shall be determined by virtue of a law.”
Article 18 of the law establishing the Constitutional Council No. 250/93 (amended by law # 150/1999) provides that:
“The Constitutional Council shall monitor the constitutionality of laws and other texts that have force of law. As opposed to any other text, no judicial authority shall do such monitoring, whether directly by means of appeal or indirectly by means of submitting a plea on the violation of the constitution or the violation of the principle of the sequence of rules and texts.”
Article 19 thereof stipulates that holders of the right to challenge the constitutionality of laws shall be determined, adding “the competent authority shall submit – under penalty of dismissing the review on procedural grounds – the review signed by the latter in person to the presidency of the Constitutional Council within a deadline of fifteen days after the law is published in the Official Gazette or in one of the other legally accredited official means of publication”. The article also includes other conditions to accept the appeal in the form.
Article 2 of the Code of Civil Procedure provides that:
“Courts shall not declare the nullity of the legislative authority’s work because of the inapplicability of ordinary laws to the constitution or to international treaties.”
Accordingly,
As it is not proven that an appeal was filed against the constitutionality of law #75/2016 and therefore, the deadline elapsed in this regard, stakeholders shall not evade compliance with its provisions, especially the ones stipulated under paragraph 3 of clause ‘third’ related to the transfer of ownership of shares that were cancelled yet not substituted within the 1-year deadline, to the State’s name after two years elapsed as from the date of entry into force of this law. However, they shall be entitled – assuming the law’s unconstitutionality – to legally claim compensation – assuming it is obligatory – as it is the case in the indirect expropriation for the public interest where the right is limited to compensating for the expropriation. In this context, it should be noted that there are numerous cases where the rights of individuals shall be transferred – after being terminated and the right thereto has lapsed – to the State Treasury for considerations related thereto and for acting in what is beneficial to the public interest.
Such cases include the following:
- The stipulations of article 90 of the Income Tax Law related to dividends of sharesand bonds and their value that the right of their holders to claim them has expired throughout the elapse of time which was terminated as outlined hereinafter.
- The case of debts imposed on inheritances that heirs did not take advantage of theirlapse by prescription. Despite such prescription, the State shall hold on to such debts when calculating the tax on inheritance because such prescription lies in its favor and not in the debtor’s favor, and they ought to be paid due to the heirs’ failure to take advantage of the lapse thereof from the inheritance.
On the right to ownership of cancelled shares prior to the elapse of the 2-year period
As mentioned above, the practice of personal rights for cancelled shares’ holders shall lapse pursuant to the prohibition imposed by the law until their holders substitute them for nominal shares within a 1-year deadline as from the date whereby the law becomes effective.
Whereas, based on the foregoing, the right in rem to the ownership of such shares shall remain for their holders as they will be able – within the deadline specified by the law for their transfer to the State’s name – to practice the rights deriving from said right towards the company that issued them, including the right to claim from the company a recovery of their nominal value which they paid upon subscription or subsequently on the dates specified in the statute.
Paragraph 3 of clause ‘third’ set a 2-year deadline as from the date of enforcement of the law for the transfer of ownership of shares that were cancelled yet not substituted within the above-mentioned 1-year deadline,
which implies that, pursuant to the effects of such legal transfer of ownership, the right in rem to the ownership shall remain for their holders during the year that follows the expiration of the set 1-year deadline to substitute cancelled shares for nominal shares. This actually grants them the right to continue practicing rights deriving from the right to ownership throughout the 2-year period as from the date whereby the law becomes effective until the date of its expiration. Upon its expiration, their right to ownership along with other inherent rights shall lapse for the State’s interest pursuant to the transfer of ownership to its name not for the interest of the company that issued the shares.
The law is one of the reasons to acquire ownership for the State. Hence, delaying its implementation will delay the State’s acquisition of cancelled shares’ ownership and the lapse of the right to substitute them upon the elapse of the first year, and this should not happen.
On the nature of the 2-year deadline to transfer ownership to State’s name
By setting a 2-year deadline to transfer the ownership of cancelled shares as from the date of entry into force of the law, to the Lebanese State’s name – and such shares are bearer shares or shares to order that are not legally subject (their ownership or transfer) to the obligation of registration in the company’s records as it is the case with nominal
shares – the legislator sought – in addition to cancelling them on said date – to put an end to risk factors and threats associated with them with regards to their ownership that is transferred by means of acquisition or with regards to being used as a means for tax evasion purposes and especially in inheritances or as a means to internally invade the company. Additionally, he wished to empower the State to practice its supervisory and fiscal role regarding these companies’ shares with the State entering many of them on a wide scale, especially the ones handling the management of a public utility. This prompted the legislator to set a short deadline concerning the fate of ownership of said shares and their inherent rights, and decided that they should be transferred, upon the elapse thereof, to the State’s name and therefore, such rights shall become invalid towards their former holders as a sanction for having failed to substitute shares related to such rights for nominal shares within the first year deadline as specified to this end, according to the opinion of legal scholar Jusran.
(In this sense, kindly review el-Sahnuri, part 3, page 1001, margin # 2)
3) On the fate of cancelled shares’ holders’ rights to dividends payable to them prior to cancellation
Clause ‘fourth’ of law # 75/2016 stipulates that:
“The provisions of both articles 90 & 91 of the Income Tax Law shall be applied to dividends of bearer shares and shares to order which holders did not cash them within the legal deadline as stipulated in the aforementioned articles.”
The Code of Commerce made it imperative, in article 101, for joint stock companies to issue and publish the relevant year’s balance on an annual basis.
In addition, the right of holders of shares issued by the company, to dividends the latter achieves at the end of each year, was regulated by article 106 of the Code of Commerce which provides the following:
“Share dividends shall only be taken from net profits which result from an authentic balance and which remain under disposal after having taken the necessary amount to form the legal and statutory reserve as stipulated in the company’s statute.”
Accordingly, the right of shareholders to profits achieved by the company is one of the obligations that the latter is responsible for, and they shall be payable each year with the issuance and publishing of the annual balance.
Concerning the termination of shareholders’ right to payable dividends, article 350 of the Code of Obligations and Contracts stipulates that:
“The prescription period is five years for arrears, interests, dividends of shares … and in general, for obligations that are payable each year.”
As for article 90 of the Income Tax Law that should be applied to the payable and accumulated dividends not cashed by cancelled shares’ holders prior to the termination of right thereto by prescription, it provides that:
“50% of what is terminated by prescription in terms of amounts of money and securities indicated below shall be definitively payable to the State:
- Dividends of shares and bonds issued by commercial and civil companies and by Lebanesebodies, whether public or private, along with their interests, earnings and revenues…
- ……
- ……”
Accordingly,
The rights of cancelled shares’ holders to dividends payable to them annually and periodically and that were not cashed prior to the entry into force of the provisions of law # 75/2016 and publishing thereof on 3/11/2016, shall be terminated respectively upon the elapse of five years for each year preceding said date. Therefore, half of dividends payable by virtue of the terminated year’s balance shall be payable to the State Treasury while the other half shall remain in the possession of the company that issued such shares.
In the event of loss, the provisions of the Code of Commerce and the statute of the company that issued cancelled shares shall apply to holders of such shares until the elapse of the fixed 1-year deadline to substitute the same. After this date, and with no substitution process being completed, the State shall replace them towards the company following the automatic transfer of shares’ ownership to its name with the elapse of the two-year period as from the date of entry into force of the law.
Third: On the constitutionality of State’s ownership of cancelled shares without compensation or without paying their value
Paragraph 3 of clause ‘third’ of the sole article of law # 75/2016 addressed the fate of the
shares that were not substituted for nominal shares, and stipulated that:
“The ownership of bearer shares or shares to order that were not substituted for nominal shares shall be transferred to the State’s name two years after the date of entry into force of this law.”
Nonetheless, it did not include an indication that the transfer of ownership shall be in return for compensation or for the payment of their nominal value.
Whereas it was already mentioned that the law establishing the Constitutional Council fixed a deadline of fifteen days to appeal the constitutionality of laws, which entails that, in the event the deadline elapses with no such appeal being filed, the provisions of this law shall be applied.
Whereas law # 75 dated 27/10/2016 is an ordinary law and it has not been proven that an appeal was filed against the constitutionality thereof by any competent authority enumerated by the constitution and by the law establishing the Constitutional Council within the fifteen-day deadline as from the date of publishing said law in the Official Gazette on 3/11/2016, which implies that its provisions have become final and binding and one cannot challenge the constitutionality of any of these provisions under the pretext that they violated, in this regard, a constitutional text or rule for the purpose of arguing that its provisions shall not come into force.
In addition, the aforementioned law cannot be considered against the constitution with regards to the transfer of cancelled shares’ ownership to the State’s name with no return because the law allowed holders and owners of such shares to substitute them, at the concerned company that issued them, for nominal shares within a 1-year period as from the date of its entry into force. In case the process of substitution is not completed within said deadline, the law implicitly allowed holders and bearers of said shares to practice the right in rem – which arises out of their ownership thereof as well as the rights deriving from such right despite the termination of the right to substitute them – within the 1-year deadline that comes after the 1-year deadline set to complete the substitution process. They shall be also entitled, upon the elapse of the two combined deadlines, to judicially claim compensation from the State for the expropriation of their ownership in case their right thereto is not terminated.
Furthermore, law # 75 / 2016 preserved for holders of cancelled shares the right to dividends of such shares, payable prior to its entry into force. In fact, the law subjected said right to the provisions of articles 90 & 91 of the Income Tax Law because the prohibition to practice such right along with all other rights related to such shares
that were not substituted, shall become effective upon the entry into force of said law and shall not include the preceding period.
Fourth: On the implementation of the provisions of law # 75 / 2016
The law stipulates in clause ‘fifth’ the following:
“The enforcement mechanisms of this law shall be determined when necessary by virtue of a decree to be issued at the Council of Ministers at the proposal of the ministers of justice, finance, economy and commerce.”
Implementation or regulatory decrees are issued for the purpose of taking measures that would ensure the proper functioning of public utilities and determine the enforcement mechanisms of laws. Regulatory or implementation provisions must observe legal texts and the general principles of the law; such provisions shall not distort or alter legal texts or fail to observe the real extent and scope of the law. The enforcement decree shall not have the effect of limiting the law’s provisions or broadening its scope.
(Decision of the State Shura Council No. 623 dated 9/7/2001 – Administrative Judiciary Magazine No. 16/2004, volume 2, page 958)
In this context, the State Shura Council stipulates in one of its resolutions:
Whereas the general rule is that the new legislative texts shall be applied immediately, and whereas knowledge and jurisprudence are settled on postponing the entry into force of the new legislative texts when it is impossible to apply them until the executive authority is able to issue the necessary decrees for the purpose of putting such texts into execution. This does not imply that the legislative texts are not effective but rather they are effective except for some of them which execution requires the executive authority’s interference with regards to the regulatory texts which makes them applicable and with regards to the issuance of administrative works which require the formation of bodies entrusted with implementing the legislation. The implementation of the new egislative texts shall be therefore postponed until regulatory texts or administrative works are issued.
(Decision of the State Shura Council No. 638 dated 17/7/2001 – the reference above, page
998 and decision of the State Shura Council No. 643 dated 10/7/2003 – Administrative Judiciary Magazine)
The legal scholar Odent says the following:
“The case of legislative or regulatory texts which entry into force is either subject, by virtue of their own provisions, to the intervention of texts specifying their methods of application, or impossible as their terms of application were not specified by appropriate regulatory measures or even some factual circumstances did not occur.
In this case … the entry into force of the law shall be postponed until the entry into force of enforcement texts themselves.”
(Kindly review Odent, administrative litigation, edition 1980 – 1981, page 420, paragraph B)
Turning to the law subject-matter of this opinion, it appears the following:
- It did not specify the texts that require the issuance of a decree to implement their provisions and which are, therefore, impossible to implement without the issuance of such decree.
- The stipulation thereof in article ‘fifth’ that ‘the enforcement mechanisms of the law shallbe determined “when necessary” by virtue of a decree, implies that the competent authority issuing the enforcement decree has the discretionary power to do so if the authority deems it necessary. Hence, the authority might not issue such decree if it deems it unnecessary for the implementation of the law provisions.
Whereas it follows from the above, that the authority required to implement the law shall indicate whether the text contained therein relating to the issue proposed before said authority is applicable or not in light of constitutional principles and legal rules in force as indicated in the Code of Commerce, the Code of Obligations and Contracts or others. In case the authority deems it impossible to implement the text relating to the issue it is required to solve, it shall refuse the implementation of this text. Therefore, not all provisions of the law, which became effective as from the date of publishing it, shall be suspended pursuant to the above-mentioned text of clause ‘fifth’.
Whereas if the implementation of the text by virtue of which the ownership should be transferred to the State’s name, requires a decree indicating the authority or ministry that said ownership must be in its name, such requirement is not enough to postpone the enforcement of said text and suspend its implementation because it does not render.
its implementation impossible according to the aforementioned provisions which stipulate the postponement or the non-implementation of the legal text. In fact, it is possible to do so upon the entry into force of the text by virtue of which the ownership should be transferred to the State’s name with the State retaining the right – at any time it may deem appropriate – to issue said decree clarifying the authorities or ministries affiliated thereto and to which the cancelled shares should belong as long as the provisions of the enforcement decree cannot amend, cancel, distort or limit the provisions of the legal text.
Therefore,
Based on the content of this opinion, as indicated above, regarding all provisions of law # 75/2016, we see the possibility of implementing all of its provisions without the need to issue a decree to that end.
In summary
Turning to everything contained in this opinion concerning the provisions of law # 75/2016, we hereby summarize it as follows:
First: By cancelling bearer shares and shares to order and by imposing the necessity of substituting them for nominal shares, the legislator sought to avoid risk factors and threats associated with the transfer of the first shares by acquisition in addition to the possible use thereof as a means for tax evasion purposes and for achieving a fake majority when resolutions are taken at the General Assembly. He sought to substitute them for safer and more regular shares because the ownership and transfer of such shares shall solely be made by means of registration in the company’s records in accordance with the provisions of both articles 455 and 456 of the Code of Commerce.
Second: The 1-year period – starting from the date of entry into force of the law – to substitute cancelled shares is a termination period as it determines the time during which the right to substitute such shares for nominal shares shall be used under penalty of the prohibition becoming definitive in practicing personal rights related thereto as authorized to them by the right in rem to the ownership belonging to its holders. Hence, the right to practice such rights shall terminate following the legally prescribed cancellation without the right to the ownership being terminated given its nature which differs from the personal right, the latter consisting in the legal bond between two persons (the holder of cancelled shares and the company that issued them) while such bond in the right in rem consists in the direct authority of this right holder upon the shares he takes, and the legislator drafted a special text determining said right’s fate.
Third: Such discrimination between the personal right and the right in rem for cancelled shares’ holders was stipulated by the legislator in law # 75/2016 subject- matter of this opinion, in the text of paragraph (1) of clause ‘third’ regarding the prohibition to practice rights related to cancelled shares for their holders “who did not substitute their shares, within a 1-year deadline as from the date of entry into force of this law”, “until they substitute such shares for nominal shares” which shall be made “within the said 1-year deadline” as from the date of enforcement of this law pursuant to the text of paragraph ‘second’ of clause ‘first’ of the law.
However, the transfer of ownership of cancelled shares – which were not substituted for nominal shares – to the Lebanese State’s name shall be made two years after the date of entry into force of the law, i.e. one year after the 1-year deadline set therein for the completion of the substitution process under penalty of termination of right in the completion thereof.
Fourth: The legislator stipulated in the law the procedures required for the completion of the process of substitution for nominal shares, by virtue of which their holders shall retain – in the event it is completed before the right is terminated – the right to practice all rights related thereto including the right to ownership as such rights are transferred with the substitution taking place, to nominal shares as indicated in clause ‘second’ of the law. Hence, he stipulated in paragraph (1) the company’s obligations with regards to completing said process, noting that it should carry out the following:
- It should “notify the holders of such shares – through publication in the Official Gazette,in 3 local newspapers and on the website if any – of the obligations as stipulated in clause ‘first’”, i.e. of the obligation to substitute them within 1 year as from the date of enforcement of the law.
- It should obtain “from the holder of such shares the name of the person that thesubstituted shares should be registered in his name pursuant to the provisions of clause ‘first’”, i.e. the obligation to indicate the name of the person that the nominal shares will be in his name in its records as proof of their rights including the right to ownership according to the provisions of both articles 455 and 456 of the Code of Commerce.
- The legislator – in paragraph (2) of clause ‘second’ – in case the companies that issuedcancelled shares fail to abide by the aforementioned notification – imposes thereon a fine penalty equivalent to 50% of their capital value.
Fifth: The legislator – in his stipulations in paragraph (3) of clause ‘third’ of the law that “the ownership of bearer shares or shares to order which were not substituted for nominal shares (within the 1-year deadline as from date whereby the law became effective) “shall be transferred to the Lebanese State’s name two years after the date of entry into force of the law” – sought to preserve, during said period, the ownership of such shares for their holders despite the termination of the right to substitute them and the termination of rights related thereto upon the elapse of the first year. In fact, within the second year of the 2-year deadline, they shall have the right to practice rights inherent to the right to ownership such as the preferential right which authorizes them to claim from the company a recovery of their value as well as the right to track the same. Upon its elapse, the ownership shall be automatically and by force of law transferred to the State’s name in which the shares should be registered as nominal shares. Therefore, the companies that issued said shares will have the obligation to register the same also in their records as it is the case upon the completion of the substitution process within the 1-year deadline.
Sixth: The 2-year deadline for transferring ownership to the State’s name is also a termination deadline because upon its elapse, the ownership of cancelled shares’ holders is terminated as a sanction for having failed to substitute them within the first year deadline, and it is automatically transferred to the State’s name by force of law for considerations deemed by the legislator as being closely linked to the public interest. Holders of cancelled shares shall not be entitled to oppose the State’s ownership thereof and their rights related thereto are terminated pursuant to the effects of cancellation and the failure to complete the substitution process during the first year as from the date of enforcement of the law. In addition, they shall have no excuse such as ignoring the law provisions in application of the principle that “ignorantia juris non excusat”.
Seventh: The legislator’s omission, in the text, of the obligation to compensate holders of shares being transferred to the State’s name, does not affect its constitutionality with no appeal being filed against it in this regard within the fifteen-day deadline as stipulated in article 19 of the law establishing the Constitutional Council and because, despite said omission, holders of such shares shall retain the right to judicially claim said compensation – whether it is due or not – based on the constitutional rule stipulated in article 19 of the constitution.
Eighth: The stipulation of law 75/2016 – namely the transfer of rights related to cancelled shares to the Lebanese State following the termination of their holders’ right, whether by the elapse of the 1-year deadline for the right to substitute them or by the elapse of the 2-year deadline for the right to ownership thereof and what derives from it – is not new in legislation. It is actually applied with regards to dividends of shares and their value when they lapse by prescription (article 90 of the Income Tax Law) and is also applied regarding lapsed debts imposed on inheritances when tax thereon is calculated, in addition to other cases.
Ninth: The legislator’s retention – for a period of 2 years as from the enforcement of the law – of the right to ownership for holders of cancelled shares that were not substituted during the first year of said period, does not imply, in any event, that the substitution process can be made during the second year thereof because of the termination of right to said process upon the elapse of the first year in accordance with its termination nature as indicated above. Therefore, the substitution right shall not be practiced after the elapse of the 2-year deadline.
Tenth: The law – by making it imperative for companies, in clause ‘first’, to substitute cancelled shares for nominal shares and register them in their records in the persons’ names in which they should be registered in conformity with clause ‘second’ of the law – implies that companies should abide by such obligation upon the transfer of said shares’ ownership to the State’s name. Hence, said companies should substitute the same for nominal shares and register them in their records under the State’s name.
Eleventh: The law stipulated, in clause ‘fourth’, the fate of the rights of cancelled shares’ holders – and the termination of the right to substitute them – to dividends payable to them annually and which were not cashed. The law subjected them to the provisions of both articles 90 and 91 of the Income Tax Law by virtue of which 50% of their terminated value shall be payable to the State Treasury by prescription. In the event they were substituted prior to the elapse of the 1-year deadline, their rights shall remain unchanged in accordance with the provisions of the Code of Commerce and the company’s statute..
In case of loss, holders of cancelled shares that the right to substitute them is terminated shall be subject, in this regard, to the provisions of the Code of Commerce and the company’s statute until the elapse of the 1-year deadline for the substitution and the State shall replace them in this regard with the ownership being transferred to its name automatically.
Twelfth: The law itself did not provide for the compulsoriness of issuing enforcement decrees thereto according to the wording of clause ‘fifth’: “The enforcement mechanisms of this law shall be determined when necessary by virtue of a decree…” which implies that the authority authorized to issue such decree might deem it unnecessary. Hence, the implementation of its provisions might be suspended by the competent authority implementing the law if it links the implementation to the issuance of said decree despite the enforcement of the law provisions upon publication in the Official Gazette No. 52 dated 3/11/2016, as per its conclusion. This comes in violation of the legislator’s will to issue the law and enforce it as from the date of publication thereof hence, suspending the implementation of all its provisions cannot be attributed to him by virtue of the text of said clause.
In addition, the non-issuance of the enforcement decree shall not constitute a barrier to the enforcement of applicable law provisions as long as new contradictory legal rules cannot arise out of it which leads to suspending the implementation of the provisions of the law in force. The non-issuance of such decree until present constitutes a pre sumption, although minor, that it is unnecessary.
In case some law provisions require for their implementation the issuance of the enforcement decree, postponing the entry into force shall be confined to this ‘some’ without all other provisions.
Thirteenth: In case the implementation of the text – related to the transfer of cancelled shares’ private ownership to the State’s name and therefore being considered as private funds owned by the State – requires an enforcement decree indicating the ministry or authority in which name they shall be registered for management purposes, such requirement is not enough to postpone the implementation of said legal text despite its entry into force. This requirement does not render the text’s implementation impossible, as per the above-mentioned regarding the delay in implementing the legal text in force, because the State is entitled, at any given time, – upon the transfer of ownership to its name in application of the text– to issue said decree specifying to which authority or ministry affiliated thereto it wishes to grant the right to manage the cancelled shares which ownership is transferred to the State by force of law in accordance with the authority conferred upon it by the right to ownership.
Fourteenth: In light of the foregoing, it appears that the provisions of law # 75 / 2016 are applicable in conformity with the constitutional rules and the general legal provisions in force as stipulated in the Code of Commerce and in the Code of Obligations and
Contracts and others. It also appears that their implementation does
not require the issuance of decrees in this regard to any of the parties thereto according to the following:
- Upon the elapse of the 2-year deadline, the ownership of cancelled shares shallbe transferred to the State’s name after their holder’s right to substitute them and to practice personal rights related thereto towards the company is terminated upon the elapse of the first year as from the date of entry into force of the law, and their right to ownership along with the rights deriving from it is terminated after the elapse of 2 years.
- Upon the transfer of ownership to the State’s name, companies shall be obligedto substitute the cancelled shares that were not substituted by their holders prior to the date of ownership transfer, for nominal shares in the State’s name. Companies shall also register them in the State’s name pursuant to the automatic transfer of ownership to its name by force of law following the termination of the right to its ownership along with all rights deriving from such ownership upon the elapse of the 2-year period.
- The right of cancelled shares’ holders to request their substitution – in case it isterminated upon the elapse of the first year as from the date of enforcement of the law – entails the termination of the right to such request upon the elapse of the 2-year period following the termination that occurred prior to it.
- The implementation of the law by substituting cancelled bearer shares and sharesto order does not affect the company’s nature as a joint stock company which right to issue shares has become limited to issuing nominal shares only.
Accordingly, we give this opinion as indicated above.