ASSESMENT OF LEGAL GAPS AND PRACTICAL PROLEMS IN GOVERNING TWO - Member PLCs IN ETHIOPIA

Abstract

Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government, and the community. Effective corporate governance is crucial for a company's success and sustainability. It enhances transparency, accountability, and fairness, which can lead to increased investor confidence, improved operational efficiency, and better access to capital. Poor governance, in contrast, can lead to corporate scandals, financial instability, and loss of public trust. A corporate governance deadlock occurs when there is an inability to reach a consensus or make decisions on key company matters. This is a particularly critical issue in companies with two parties holding an equal 50% share each. This ownership structure is highly susceptible to deadlocks as neither party has the majority vote to override the other's objections. Such deadlocks can arise on various issues, including strategic decisions, operational changes, financial allocations, or the appointment of key personnel. The resulting paralysis can have severe consequences, hindering business growth, creating operational inefficiencies, and potentially leading to the company's dissolution. This thesis examines the issue of corporate governance deadlock in two-party companies where each party holds a 50% ownership stake. It delves into the specific problem of a governance deadlock, which is an inherent risk in equal-ownership structures. The thesis examines the adequacy of the legal framework governing two-member PLC structures in Ethiopia, identifies legal and governance gaps and challenges specific to two-member PLCs, analyzes how disputes and deadlocks are currently handled under Ethiopian law, explores comparative legal approaches to governing two-member PLCs. Using a combination of theoretical analysis and case studies, this study aims to provide a comprehensive guide for managing and mitigating the risks associated with 50/50 shared PLCs, offering practical solutions for policymakers, legal practitioners, and business owners. In general the commercial code has no tailored legal provisions specifically designed to address two-shareholder deadlocks. Accordingly, the thesis tries to recommends that the commercial code should be amended to incorporate provisions that provide solutions for deadlock such as giving courts the power to give tie-breaker decision, buyout solutions, to appoint custodian. Or alternatively a regulation or a directive that deals with deadlock resolution should be issued. Further the relevant government should prepare a model memorandum of association that incorporates solutions to possible deadlocks.