TITLE TEN

AFFILIATION, MERGER AND DIVISION OF BUSINESS ORGANIZATIONS

CHAPTER ONE GROUPS OF COMPANIES

Article 550. Definition of a “Group”

1/ a “group” is a set of companies comprising of the parent company and all its domestic
and foreign subsidiaries, unless otherwise provided by law.

2/ a “subsidiary” is a company subjected to the control of another company, the “parent”

company, either directly or indirectly through another company.

3/ a “parent” is a company that has subjected another company to control either directly
or indirectly through the instrumentality of another company.

4/ the term “control” shall have the meaning provided under Article 552 for the purpose
of Sub-Article (2) and (3) of this Article.

5/ for the purpose of this Title “company” shall mean a share company, private limited
company, one person 336 www.ethiodata.et private limited company and as appropriate
any other business organizations registered abroad that is of similar nature with these.

Article 551. Definition of a “Wholly-owned Company

” A “wholly-owned Company” is a company with no other shareholders except its parent

company and any other subsidiary of its parent company or persons acting on behalf of
its parent or such other subsidiaries.

Article 552. Definition of Control

1/ “Control”, for the purpose of this chapter, is the power to formulate and govern, alone
or with other shareholders, the financial and operating policies of a subsidiary.

2/ Without prejudice to Sub-Article (1) of this Article control of a subsidiary exists where
a company owns, directly or indirectly, shares with voting rights representing more than
half of the capital in that subsidiary. Nevertheless, the legal effects of “control” shall not
follow if, under exceptional circumstances, it can be clearly demonstrated that such
ownership does not constitute control.

3/ Where one company holds shares with voting rights representing half or less than
half of the capital of another company, control exists over the second if the former has
one or more of the following:

a) the right to exercise more than half of the voting rights by virtue of an agreement with
other shareholders;

b) the right to control the financial and operating policies of the company under the
memorandum of association or any agreement;

c) the right to appoint or remove the majority of the members of the governing body,
which has the power to run the business; or

d) acquired the right to exercise the majority of votes at general meetings or an

equivalent body and thus has actual control of the business.

4/ Control is presumed to exist under Sub-Article 3) (c) and (d) of this Article when a
majority of the members of the governing body of a company has been appointed by a
company holding half or less than half of the voting rights in the Relevant Company for
two successive financial years. The Relevant Company is deemed to have effected
such appointments if, during that financial year, it held a fraction of the voting rights
greater than 40%, and if no other shareholder directly or indirectly held a fraction
greater than its own.

Article 553. Calculation of Participation

1/ In calculating voting right for the purpose of determining whether there is control,
rights to subscription and purchase of shares carrying voting rights that are currently
exercisable or convertible are to be included.

2/ Any voting rights attaching to shares owned by the subsidiary itself or by its
subsidiaries must be disregarded in the determination of the voting rights in a subsidiary
held by the parent company.
Article 554. Duty to Disclose Control

1/ The management of the parent company must inform in writing the management of a
subsidiary as soon as control has been established or removed.

2/ As soon as it is informed, the subsidiary, unless it is a foreign company and such

obligation is not recognized by the law of the country whose rules apply to the
subsidiary, must inform without delay the parent company of the number of shares and
voting rights held by it in the parent company, and in any other companies.

Article 555. Reciprocal Holding of Shares

1/ A subsidiary may not hold any shares directly or indirectly in the parent company.

2/ Where five per cent or more of the capital of one company is held by a second
company, the first company may not hold shares in the second company even where
there is no parent subsidiary relationship.

3/ Where two companies each have a capital holding in the other company and one of
such holdings is five per cent or more of the capital, the companies shall declare their
holdings to the Ministry of Trade and Industry or another pertinent authority which shall
require the companies by agreement to reduce their holdings so as to conform to the
provisions of sub-art (2). If the companies fail to agree, the Ministry of Trade and
Industry or another pertinent authority shall order the company possessing the smaller
holding to dispose of that holding.

4/ where the respective holdings are equal, and failing one company disposing of its
shares in the other, each company shall reduce its holding to less than five per cent of
the capital of the other.

5/ the companies shall furnish to the Ministry or another pertinent authority a written
statement that they have complied with the foregoing provisions. The right to vote and
participate in the distribution of profit conferred by the shares that should, thus, be
transferred shall be suspended pending compliance with the provisions of this Sub-
article

Article 556. Right to Give Instructions to the Management of the Subsidiary

1/ a parent company, acting as a shareholder in the general meeting of shareholders or
through its board of directors or senior management has the right to give instructions to
the organs of management of its subsidiaries.

2/ Subject to the conditions specified under Article 563 and the exception in Sub-Article
(3) of this Article, the organs of management of a subsidiary shall comply with the
instructions issued by the parent.

3/ Directors and managers who were not appointed by the parent company, but as a
result of provisions in the memorandum of association, or a shareholders’ agreement or
of any law or regulation are not bound by the instructions of the parent company.

4/ A non-wholly-owned subsidiary shall clearly indicate in the Commercial Register kept

by the Ministry of Trade and Industry or another pertinent authority whether or not its
management is directed by the parent.

5/ In the absence of a contrary disclosure, a wholly owned subsidiary is presumed to be

subject to instructions of its parent company and does not need to make a disclosure in
the Commercial Register, except to disclose that it is wholly-owned.

Article 557. Right of Access to Information from the Subsidiary

The board of directors or a management body at equivalent status of the parent

company has the right to obtain any information from a subsidiary, unless such
communication would violate the law of another country which applies to the subsidiary
or the rights of third parties.

Article 558. Right to Squeeze-out

1/ A parent company, controlling more than 90% of the capital and voting shares of the
subsidiary, has the right to purchase the remaining shares from the other shareholders
in the subsidiary.

2/ The provisions under Article 294 sub–Article (2) to (7) shall apply to such purchase.

Article 559. Right of Shareholders of the Parent Company

1/ the relationship between the companies of the group, including companies formerly
members of the group, are subject to the right of shareholder to information and the
right to request a special investigation.

2/ Shareholders of the parent company shall, in particular, have the rights provided
under Article 355, 358 and 381 Sub-Article (1) (a) and (b) with respect to subsidiaries of
the company.

Article 560 Corporate Opportunities within a Group

1/ A parent company whether registered in Ethiopia or abroad, must not itself or through
another subsidiary exploit a corporate opportunity of a subsidiary unless it has received
the approval of directors of the subsidiary that have not been appointed by it, and if
there are none, of the non-controlling shareholders of the subsidiary.

2/ The prohibition imposed on a parent company under Sub-Article (1) of this Article
shall not apply to a wholly owned subsidiary.

Article 561. Right of Shareholders in the Subsidiary to Request Investigation

The shareholders of a subsidiary that hold voting shares that represent ten percent of
the capital can request the conduct of a special investigation on the parent company in
relation to a decision which has affected the interest of the subsidiary, under the same
conditions as provided under Article 559.

Article 562. Right to Sell-Out

1/ When a parent company owns directly or indirectly more than ninety percent of the
shares with voting rights in a subsidiary, the other shareholders may request that their
shares be purchased by the parent company.

2/ The shareholders of a subsidiary can request in court that the parent company or
another person designated by it purchase their shares.

3/ The provisions of Article 292 Sub-Article (2) to (5) shall apply to the sell-out
necessary changes having been made.

Article 563. Interest of the Group

1/ the management or director of a subsidiary that acts in a way contrary to the interest
of the subsidiary, whether or not as a result of an instruction issued by the parent
company, shall not be deemed to have acted in breach of their fiduciary duties only if:

a) the decision is in the interests of the group as a whole;

b) the management, acting on the basis of the information available to them and that
would be available to them if they complied with their fiduciary duties before taking the
decision, may reasonably assume that the damage will, within a reasonable period, be
balanced by gain, and

c) the damage is not such as would place the continued existence of the company in
jeopardy.

2/ If the subsidiary is wholly-owned, Sub-Article (1) (b) shall not apply.

3/ The management of the subsidiary may refuse to comply with instructions from the
parent company if the conditions set in Sub-Article (1) are not satisfied.

Article 564. Wrongful Trading

1/ Whenever a subsidiary company, which has been managed according to instructions

issued by its parent even in the interest of the group, has no reasonable prospect, by
means of its own resources, o f avoiding dissolution or winding-up, the parent company
shall without delay effect a fundamental restructuring of the subsidiary or initiate its
winding-up procedure.

2/ If the parent company acts in contravention of Sub Article (1) of this Article, it shall be
held liable for any unpaid debts of the subsidiary incurred after the said crisis point.

3/ If the parent company has managed the subsidiary to the detriment of the subsidiary
and in violation of the 346 interest of the group, it shall be held liable for any unpaid
debts of the subsidiary which are the consequences of the harmful instructions.

4/ The right to claim compensation provided for in Sub Articles (2) and (3) of this Article
can be invoked only by the liquidator or trustee of the subsidiary. The liquidator or
trustee, as the case may be, is obliged to exercise such claim if creditors holding not
less than 10 % of the debts of the subsidiary request that
OPTION 1: Establish a Holding Company (Group
Structure)
📌 Definition:

A holding company is a parent legal entity that holds a controlling interest (typically 50%+ of
voting shares) in various subsidiaries, including commercial banks, investment banks, insurance
firms, microfinance institutions, etc.

✅ Key Features:

Area Detail
All group entities (e.g. Coop Bank, Coop Investment Bank, future insurance,
Ownership
leasing companies) are owned by the holding company.
Legal The holding company is a new legal entity, and Coop Bank becomes one of its
Identity subsidiaries.
The board and management of the holding company oversee strategy and
Control
investment decisions across subsidiaries.
Capital is injected by the holding company into each subsidiary based on their
Capital Flow
needs.
Each financial institution needs a separate license (e.g., from NBE, Capital Market
Licensing
Authority).

✅ Strategic Advantages:

1. Long-Term Scalability:
o Fits long-term vision of a diversified financial group.
o Easier to add more services (e.g., insurance, fintech, leasing) under one group
umbrella.
2. Risk Isolation:
o Legal and financial problems in one subsidiary (e.g., Coop Investment Bank) do
not legally spill over to Coop Bank.
3. Investor Access:
o You can attract strategic partners at the group level, or even list the holding
company or individual subsidiaries.
4. Brand & Governance Independence:
o Each subsidiary operates with tailored strategy, compliance, and performance
targets.
5. Future Exit/IPO Flexibility:
o You can sell or list parts of the business (e.g., IPO for Coop Investment Bank)
without affecting the rest.
⚠️Strategic Disadvantages:

1. Initial Restructuring Complexity:

o Legally transferring Coop Bank’s ownership to the new holding company may
trigger capital gains, registration costs, and require regulatory approvals.
2. Double Governance Layers:
o Both holding and each subsidiary require boards and compliance teams.
3. No Group Tax Filing in Ethiopia:
o Unlike developed countries, Ethiopia doesn’t currently allow consolidated tax
filing — meaning no tax efficiency between group entities.
4. Time & Legal Risk:
o May take months to obtain approvals and fully transfer Coop Bank into the group
structure.

🧾 Example Structure:
java
CopyEdit
➤ Coop Financial Holding Company (New Entity)
|
┌──────────────────┼────────────────────┐
| | |
Coop Bank Coop Investment Bank Coop Insurance (Future)

🔴 OPTION 2: Establish Investment Bank as a Subsidiary of

Coop Bank
📌 Definition:

In this setup, Coop Bank remains the parent, and directly establishes the Coop Investment
Bank as a wholly owned subsidiary.

✅ Key Features:

Area Detail
Ownership Coop Bank owns 100% (or majority) of Coop Investment Bank.
Governance Investment bank reports directly to Coop Bank's executive and board.
Licensing Coop Investment Bank still needs a separate license from the Capital Market
 Area Detail
Authority.
Structure No need to restructure Coop Bank or create a new parent entity.

✅ Strategic Advantages:

1. Simplicity & Speed:

o Coop Bank can quickly form a subsidiary and start operations with fewer legal
hurdles.
2. Lower Initial Cost:
o No need for holding structure setup, transfer of shares, or board duplication.
3. Direct Management:
o Coop Bank retains tight control over the subsidiary and can provide financing,
staffing, and governance easily.
4. Regulatory Familiarity:
o Easier for regulators to supervise, as it's an extension of Coop Bank’s operations.

⚠️Strategic Disadvantages:

1. Risk Concentration:
o Legal, financial, or reputational problems in the investment bank can impact
Coop Bank directly (due to shared risk and brand).
2. Limited Flexibility:
o Difficult to attract outside investors or partners to only the investment bank.
o Can’t easily spin off or list the investment bank separately.
3. Cross-Regulation Risk:
o Regulatory overlap: Coop Bank is under NBE while the investment bank is under
Ethiopian Capital Market Authority. Coordination becomes crucial.
4. Potential Conflict of Interest:
o If Coop Bank wants to raise capital via the investment bank (e.g., issue bonds),
independence is questioned.

🧾 Example Structure:
➤ Coop Bank of Oromia
|
➤ Coop Investment Bank (New Subsidiary)

🟨 Decision Matrix (Summary)

 Subsidiary Model (Under Coop
Criteria Holding Company Model
Bank)
Complex – needs full Simple – just register new
Legal Setup
restructuring subsidiary
Speed to Launch Slower Faster
Cost (initial) High (legal, tax, transfer) Lower
Future Growth &
Excellent Limited
Scalability
Risk Isolation High Low (Coop Bank exposed)
Investor Attraction Easier at group or sub-level Harder
Neutral in Ethiopia (no group
Tax Efficiency Neutral
tax)
Regulatory Complexity Higher (multi-entity licensing) Moderate
Brand Independence High Low

🟢 Recommendation:
Based on your goal of forming a financial group with Coop Bank, an investment bank, and
potentially other services:

 In the long term, the holding company model is strategically superior.

 In the short term, starting with a subsidiary structure under Coop Bank is faster,
cheaper, and can be upgraded to a group structure later.

1. What Is a Holding Company?

A holding company is a legal entity created not to operate a business directly, but to own
controlling shares in multiple businesses.
It does:

 Hold ownership stakes (typically >50%) in subsidiaries.

 Set strategic direction for the group.
 Receive dividends or profits from subsidiaries.
 Approve major decisions (M&A, expansion, etc.).

It does not:

 Lend money like a bank.

 Underwrite like an insurance company.
 Provide investment services directly.

Instead, it owns entities that do those things.

🔷 2. How a Holding Company Owns Subsidiaries?

Let’s take your example:

Coop Bank of Oromia

Shareholders = 27,000
Paid-up Capital = ETB 11 billion
Total Assets = ETB 140 billion
Majority of shareholders = cooperatives and unions in Oromia

Now, if you want to create a holding company, the structure will reverse ownership:

🔁 Existing Structure:
CopyEdit
27,000 Shareholders ─── own ───> Coop Bank

🔁 Proposed Holding Structure:

matlab
CopyEdit
27,000 Shareholders ─── own ───> Holding Company
|
├── 100% Coop Bank
├── 100% Coop Investment Bank
└── 100% Insurance Company (future)

This means:

 Shareholders will no longer directly own Coop Bank.

 They will own the Holding Company, which owns Coop Bank.
🔷 3. Why Does This Require Share Transfer?
To make this work:

1. You must create a new Holding Company (e.g., “Coop Oromia Financial Group S.C.”).
2. The 27,000 Coop Bank shareholders must swap their shares in Coop Bank for shares in
the Holding Company.
3. Then, the Holding Company becomes the 100% owner of Coop Bank.

This transaction is called a share swap or restructuring.

🔶 4. Capital Gains Tax Risk

Here’s the key issue in Ethiopia or any jurisdiction with capital gains tax:

If a shareholder sells or transfers shares and receives value in return, the government may
charge Capital Gains Tax (CGT).

In your case:

 The 27,000 shareholders are giving up their Coop Bank shares, and receiving Holding
Company shares instead.
 This could be treated as a "sale" under tax law—even if it’s just restructuring.
 Hence, unless there's a tax exemption for corporate restructuring, the shareholders may
be liable to pay CGT on the increased value of their Coop Bank shares.

🟡 Example:

 A shareholder bought Coop Bank shares at ETB 10,000

 Today the value is ETB 100,000
 The "gain" is ETB 90,000
 If this is treated as a transfer/sale, CGT is applied on the ETB 90,000 gain.

BUT: In many countries, if the restructuring is done under approved corporate reorganization
rules, tax authorities may defer or exempt capital gains.

🔷 5. Legal Ownership Transfer: Illustration

Let’s say:

Coop Bank Now After Holding Company

Entity Name Coop Bank of Oromia S.C. Coop Oromia Holding S.C.

Owners 27,000 Shareholders 27,000 Shareholders

Directly Owns Banking operations Coop Bank + Coop Investment Bank

Shareholder Certificates Issued by Coop Bank Issued by Holding Company

🔁 Restructuring Steps:

1. Form Coop Oromia Holding Company S.C.

2. All 27,000 shareholders sign a share swap agreement:
o For every 1 share in Coop Bank, they get 1 share in the Holding Company (or
based on an agreed ratio).
3. Then, the Holding Company becomes 100% owner of Coop Bank.
4. Coop Investment Bank is formed as another 100%-owned subsidiary.

🔷 6. Regulatory Approvals Required

You would likely need clearance or no-objection from:

 National Bank of Ethiopia (NBE)

 Ministry of Trade (for business license structure)
 Capital Market Authority (if planning future listing)
 Ministry of Revenue (to clarify tax exemption for share swap)

✅ Summary of Key Points

Topic Details

Who owns the Holding Company? The 27,000 shareholders

Who owns Coop Bank after

The Holding Company
restructuring?

Yes — Coop Bank shares are swapped for Holding Company

Is share transfer required?
shares

Is capital gain tax triggered? Possibly — unless tax deferral is granted

Benefit of Holding Structure Long-term scalability, control over all financial services
 Topic Details

Risk Tax and legal complexity, restructuring cost

Recommendation
Before moving to a group holding structure:

1. Engage tax and legal advisors to explore a tax-neutral restructuring.

2. Start with Coop Investment Bank as a subsidiary of Coop Bank, which avoids share
transfer and tax risk.
3. After launching the investment bank and building a solid business case, transition to a
holding company within 2–3 years — ideally when there is legal clarity on capital gains
and restructuring provisions.