1. Introduction:
Ethiopia has of late taken measures that liberalize the financial sector. The issuance of the new Banking Business Proclamation No. 1360/2025 (Banking Business Proclamation) and Capital Markets Proclamation No. 1248/2021 (Capital Market Proclamation) are salient examples. The former opens to foreign investors the banking business that had been off-limits to them. Mergers and acquisitions in the banking sector have, therefore, received a great deal of attention recently. This brief note sheds light on the salient features of Ethiopian laws on merger and acquisitions in the said sector.
2. Merger and Acquisition: What do they mean under Ethiopian law?
The Banking Business Proclamation, the Capital Markets Proclamation, and the Commercial Code of Ethiopia Proc. No. 1243/2021 (Commercial Code) deal with these concepts to varying degrees.
To start with merger, Art. 565 of the Commercial Code defines the merger of business organizations as an operation whereby two or more entities merge into one. There are two ways in which this can take place according to the Commercial Code. The first is what it calls 'merger by the formation of a new organization.' Per this modality, two or more existing business organizations are wound up without liquidation by transferring all their assets and liabilities to a legal entity, formed for this purpose. The shareholders of the business organizations that are wound up are issued shares in the newly formed entity. The second modality is merger by acquisition. This is an operation whereby one or more existing business organizations are 'wound up without liquidation by transferring all their assets and liabilities to a preexisting organization.' The Commercial Code does not define the term acquisition itself. All we can gather from reading its provisions is that acquisition is a modality for the implementation of a merger.
The Banking Business Proclamation on the other hand defines 'merger' as a 'fusion' of two or more banks where one or more banks lose their existence, and a new bank is formed (Art. 2(47)). This is conceptually the same as 'merger by the formation of a new organization' in the parlance of the Commercial Code. The Banking Business Proclamation goes on to define 'acquisition' as 'a full or partial purchase or takeover of a bank' by another bank. Full purchase or takeover of a bank under this law may be understood as 'merger by acquisition' in the language of the Commercial Code if the purchased entity ceases to exist. Under Art. 33 of the Banking Business Proclamation, 'Partial purchase or takeover' seems to refer to a situation where a bank acquires shares in another existing bank, which is short of merger or fusion of the entities involved.
Art. 83 of the Capital Markets Proclamation defines 'acquisition offer' in the context of minority investor protection as a solicitation or offer to 'own majority percentage of a listed company that enables the offeror, directly or indirectly, to control the board of directors of the company.' This is a situation akin to partial purchase or takeover discussed in the context of the Banking Business Proclamation. The Capital Markets Proclamation does not define merger.
Reading all the three laws together, we can conclude that while 'acquisition' may be a modality for effecting merger under the Commercial Code, the term has a broader meaning in the two other proclamations. It refers to the purchase of a substantial number of shares in another entity without ending the legal existence of the target entity. In other words, every acquisition does not result in a merger.
3. Risks Posed by Merger and Acquisition and the Safeguards against them.
The merger and acquisition of banks may pose major macro-level risks seriously impacting on the public at large and micro-level risks affecting shareholders and certain types of creditors. The macro-level risks include, among others, risks to: - a) banking systems stability b) access to financial services (consumer protection issues) and c) competition and loss of efficiency-related risks.
The Banking Business Proclamation makes mergers and acquisitions subject to prior written approval by the National Bank of Ethiopia (NBE) to avert such risks. Art. 33(4) provides no merger or acquisition may take place where the NBE finds either of them to be detrimental to: 1) the soundness of the bank and financial system stability 2) the interest and right of consumers to access financial services and 3) competition and efficiency in the banking system. The Proclamation also envisages the issuance of a directive and/or operational framework by the NBE on the minimum conditions, requirements and procedures governing mergers and acquisitions. The Banking Business Proclamation does not provide much by way of minority investor protection in the context of mergers and acquisitions.
The Capital Markets Proclamation aims at providing protection to shareholders in cases of acquisitions that do not result in mergers. Art. 84 requires a person wishing to 'submit an acquisition offer' to submit copies of the offer documents to the Capital Markets Authority (Authority), the pertinent securities exchange, and the issuer of the securities subject to the offer. The Authority is given a maximum of ten days to review the application and issue its decision.
Existing shareholders of the company which is subject to the acquisition offer must be given adequate information and reasonable time to consider the merits of the proposal. They are entitled to a 'fair and equitable treatment' in relation to the proposal.
4. Conclusions
The Banking Business Proclamation and the Capital Markets Proclamation are not meant to cover all the legal issues that may arise in the context of mergers and acquisitions. Other laws, particularly the Commercial Code, complement these laws as regards various issues that arise in the context of merger, including micro-level risks to minority investors and creditors of the banks.
For further details on protection of minority investors, readers are advised to read a short article that we have published on mondaq: https://www.mondaq.com/shareholders/1592344/minority-investor-protection-under-ethiopian-law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
