Bahrain: Changes to the Commercial Companies Law – 2020


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On 1 October 2020, Law 28 of 2020 was published in the Official Gazette (the Amended Law) which amends Decree Law No. 21 for the year 2001 (the Commercial Companies Law) in a number of substantial ways.

Conversion of SPCs to WLLs

One of the notable changes resulting from the Amended Law is the cancellation of Part VIII of the Commercial Companies Law in relation to Single Person Companies (SPCs), which removes the use of SPCs as a corporate entity, and requires that such existing SPCs must convert to a limited liability company (WLL) within 6 months of the implementation date of the Amended Law (i.e. 2 April 2020).

As a result of the above change to the Commercial Companies Law, the requirement that a WLL have at least two shareholders has now been removed by the Amended Law. In order to make the conversion easier for SPCs, the Amended Law has removed any minimum capital requirement for a WLL.

SPC owners will need to consider some differences to the way they have run the company under the previous regime:

1 they will now, as a WLL, be required to have a general assembly of the shareholders once a year and within six months of the end of the company's financial year. The requirement that a WLL holds a general assembly has not been tweaked pursuant to the Amended Law and, as a result, a WLL with a single shareholder will have to hold a general assembly (albeit with only one shareholder). 

2 there are certain items prescribed by the Commercial Companies Law which must be included in the memorandum of association of a WLL, that were not required in a SPC's declaration, for example:

2.1 names, titles and nationalities of the partners / shareholders;

2.2 company's headquarters;

2.3 company's name and address, with the addition of the phrase (a limited liability Company);

2.4 company's objectives;

2.5 company's capital, and the cash and in-kind shares provided by each partner with a detailed description of the in-kind shares and its value;

2.6 conditions of shares assignment;

2.7 terms of the company (if any);

2.8 the names of the managers / directors (or the names of the members of the control board (if applicable); and

2.9 distribution methods of profits and losses.

3 the duties, obligations and responsibilities of the managers / directors of the WLL are the same as those of the board of directors under a joint stock company. This is a more formal and comprehensive set of obligations than the owner of a SPC may be used to. The importance of this requirement on the managers cannot be understated as all managers are jointly liable to the company, partners (shareholders) and third parties for any breach of the law, memorandum or articles of association and for any mismanagement of the company in accordance with the rules for a joint stock company.

Admission of a new shareholder in a WLL

The previous draft of the Commercial Companies Law required, in respect of a WLL, the unanimous approval of all shareholders in order for a new shareholder to be admitted to the company. This restriction would cut across any conflicting provisions in a shareholders agreement. The Amended Law removes this requirement, thereby allowing more flexibility to the accession of a shareholder.

Not for profit companies

The Amendment Law introduces a new type of WLL entity, which is a company that does not aim to achieve profit in the main and any profits that are made must be used to further the company's objectives (the Not for Profit Entity). The Not for Profit Entity is prevented from distributing any profits directly or indirectly to any of its partners.

In the event of the liquidation of the Not for Profit Entity, any remaining profits must be distributed to any partner that is a non-profit organisation, however, if the partners are not a non-profit organisation then the funds need to be distributed to non-profit entity with similar persons.

The Amendment Law permits the conversion of any existing entity to a Not for Profit Entity, however, a Not for Profit Entity may not convert to any other form of a company. The controls and obligations relating to a WLL entity under the Commercial Companies Law or the Amendment Law shall apply to the Not for Profit Entity.

Reporting

Under the previous draft of the Commercial Companies Law, there was a requirement, in respect of joint stock companies, for the annual board report to shareholders to include a statement of the remuneration of the board of directors in years where the company fails to make a profit or distribution to the shareholders. This remuneration must include all salary, bonuses and attendance fees paid to the directors in that year. Under the Amendment Law, this requirement now extends to the senior management of the joint stock company, as well as the board members.

Share Capital

1.  Preference shares

The previous draft of the Commercial Companies Law permitted the issuance by a joint stock company of shares with certain privileged rights in respect of voting, profits or upon liquidation. The Amended Law expands upon these provisions and permit the issuance of preference shares in addition to ordinary shares. The Amended Law provides for several classes of preference shares, provided that the shares of the same class are equal in terms of rights and benefits.

2.  Convertible loan bonds and debt into shares

The Amended Law has expanded the ways in which a joint stock company can raise capital, including the conversion of loan bonds issued by the company into shares or converting the company's debts into shares in favour of the debtor, as well as providing an in-kind share for the company.

A closed joint-stock company may, after receiving approval of the EGM, issue bonds convertible into shares.

3.  Priority of existing shareholders to new share issuance

The Amended Law introduces three exceptions to the requirement that existing shareholders have priority in new share issuances and these are:

(a) shares issued by the company for the employee stock program;

(b) shares issued by the company to enter a strategic partner, where such strategic  partner can provide tangible technical, operational or marketing support; and

(c) shares issued by the company against debt.
In respect of the shares to be issued pursuant to (b) and (c), a decision of the EGM is needed approving the capital increase for such a purpose.

4. Employee stock programmes

The Amended Law introduces provisions permitting a joint stock company to have one or more programmes to motivate its employees through share ownership. The company must disclose to the employees full details of the share ownership programme. The CBB shall have additional requirements for employee share ownership programmes for listed joint stock companies / CBB-licensed companies. The MOICT shall be responsible for issuing regulations for the employee share ownership schemes for all other entities.

5. Put and Call Options in the event of

In the event that a takeover offer has been submitted in respect of a listed joint-stock company by a party and such offer has been accepted by 90% or more of the shareholders then, under the Amended Law, the acquiring party has the option to require the remaining 10% of shareholders to sell their shares within 3 months. The Amended Law also provides shareholders who have previously rejected the takeover offer, to require the acquiring party to purchase their shares within 60 days, if the takeover has been accepted by 90% or more of the shareholders. This right is analogous to the Compulsory Offer provisions in the TMA module of the CBB Rulebook, but by inserting into the Commercial Companies Law, it helps to avoid any confusion.

The changes to the Commercial Companies Law as a result of the Amended Law provide more flexible ways of raising capital that we have seen elsewhere in the region, which will be particularly helpful for start-ups. These are positive developments for companies experiencing financial issues and seeking to raise capital as a consequence of the Covid-19 pandemic.


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