You should know this if you are a Director on the Board of an Ethiopian Company

Watching TV, you came to know of a lucrative business. This business would bring you more money if you do it in your individual capacity or through your family company. Do you think you can take this opportunity even if the opportunity falls within the company’s (that you serve as a director) business objective? Here is what the law says.

The Prohibition

One of the major changes to the old Commercial Code, in the 2021 Commercial Code, is found in the section that deals with directors.[1] One of the new additions is the doctrine of corporate opportunity. This doctrine prohibits directors from diverting any opportunity, that the company may take, to themselves.

Article 320 (1&2) of the new Commercial Code reads as follows:

“Conflict of Interest

 1) A director of a company shall avoid a situation in which he has a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.

2) The prohibition under Sub-Article (1) of this Article shall apply in particular to the exploitation of any property, information, or business opportunity regardless of whether the company could take advantage of the property, information or opportunity.” (emphasized).

As you can see from the above provision, a director should avoid any possible conflict of interest which may include the above scenario. If the company may have an interest in the opportunity that you come across, that probably creates a conflict of interest. So, the director is required to avoid it.

The fact that the company could not take the opportunity due to financial or other reasons cannot be a defense. That is to say, you cannot say “I took the opportunity for myself because the company was not in a position to take the opportunity”.

It is also to be noted that the duty continues even if the director is no more serving there. Sub-article 3 of Article 320 stipulates that the director cannot utilize any business opportunity or information he became aware of because of his position, even after leaving the office. The prohibition is extended to the utilization of the opportunity for the benefit of third parties.

Thus, diverting an opportunity (even if you know it in your personal capacity) makes you liable unless the board ratifies it pursuant to Article 320(5).

What is expected of the directors is simple; let the company know it, and take it if the company does not want to take the opportunity.

What You Should Do

According to Article 321 of the new Commercial Code, what is expected from the directors is to disclose the opportunity that may give rise to any conflict of interest and let it know if you are interested in the opportunity. If the company is not interested in the opportunity, then you can go for it.

[1] Read and Compare Articles 347-367 of the OLD COMMERCIAL CODE and Articles 296-336 of the NEW COMMERCIAL CODE. You can see that the Old Commercial Code contains 20 provisions while the new one contains 40 provisions.

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