A review of a draft of Companies Law that is currently waiting to be debated in the General National Congress has warned that it could be more restrictive to foreign companies wanting to invest in Libya than the one adopted by the former regime.
Lawyers Albudery Shariha and Leopold Zentner released an assessment observation in which they pointed out that while the law is good in some aspects it remains short on others.
“This law is so critical for Libya’s future that it needs to be properly debated and researched,” they noted.
What worries these lawyers is the lack of experience on the part of those who are tasked to draft such critical law. They say: “It is inappropriate for a committee of unelected court notaries and lawyers to be undertaking the task of drafting this new law, as most of them have limited experience of the international business world and they are not entrepreneurs or businessmen themselves.”
“A good Companies Law needs to be user friendly and must take into account the needs and requirements of both Libyan businessmen and the international investor-it should not be drafted in isolation by career civil servants and government officials who often tend to consider issues purely from an academic (rather than practical) perspective,” they stressed.
The lawyers point out that in the UK, for instance, the process involved in developing its most recent Companies Law in 2006 took 8 years and was a collaborative process. Similarly, in places like the UAE, the new UAE Companies law has been debated now for 10 years.
“Whilst we are not suggesting that Libya should take anything like this length of time to prepare a new Companies Law, we do think Libya should take some time to get it right, rather than trying to rush through an ill thought out piece of legislation that will provide a poor foundation for Libya’s future growth and development,” they added.
“In relation to FDI, the main challenge in drafting a new Companies Law is to set the right balance. Most mainstream economists agree that protectionism is harmful in that its costs outweigh the benefits and that it impedes economic growth-consequently, protectionism harms the very people that it is supposed to be helping.
“at this point of time there must clearly be some sensible limitations on FDI as Libya opens its doors to the world for the first time in nearly half a century. This is needed to protect the fledgling Libyan private sector from powerful international companies that have the economic muscle, global reach and know-how to dominate a completely open market.
“However, in assessing what barriers to trade Libya should introduce, legislators should not lose sight of the bigger prize of attracting foreign capital and expertise. It is of paramount importance that any new FDI rules must also provide some encouragement to the international business community to work alongside Libyan businessmen, pay Libyan taxes, invest in training and development and most importantly hire large number of Libyan nationals who need to find private sector jobs. In our view, allowing foreigners to only take a minority equity share position in a company is a major disincentive, and will result in many of these investors looking elsewhere for new markets and opportunities.
To face the huge challenge of striking the right balance between protectionism and an open market, the lawyers suggest that the Libyan government refers to the FDI Index prepared by the OECD to assess how various countries rate in these rankings.
The OECD FDI Index gauges the restrictiveness of a country’s FDI rules, they say.
These rules include screening or approval mechanisms; restrictions on the employment of foreigners as key personnel; and operational restrictions, e.g. restrictions on branching and on capital repatriation or on land ownership.
A country’s ability to attract FDI will be affected by factors such as the size of its market, the extent of its integration with neighbours and even geography. Nonetheless, FDI rules are a critical determinant of a country’s attractiveness to foreign investors. Furthermore, unlike geography, FDI rules are something over which governments have control.
According to them, the new law reverses the 65/35 rule passed just over twelve months ago in May 2012. The previous Decree No. 103 of May 2012 was a logical development of the joint venture investment law, which has been in force for several years. In our view, the changes in permitted FDI percentages outlined first in Decree No. 207, and then carried through to the new Companies Law will curtail not just FDI but also investment generally into the private sector.
"Under the new Companies law, it is proposed that Libyan shareholders can only issue up to 49% of a joint venture to a foreign partner (rather than 65% provided for in Decree No. 103 of 2012). In other words, foreign companies cannot ever own more than half of any company set up in Libya. A foreign investor often provides most capital required in a new enterprise. With the reduction to 49%, many Libyan start-up ventures, which might previously have been funded by foreign investors, will no longer be capitalised by such partners.
"On the face of it, new companies will be majority owned by Libyans. In theory, this is positive for Libyan businessmen, but only if they can find a foreign shareholder that is prepared to take a minority share in what many foreign investors still consider to be a country that is subject to “political risk” and that also has a chequered history for protecting foreign investments.
“Clearly, granting a majority shareholding right to Libyans is no longer an advantage if the Libyan businessman can’t find an international partner to invest, or if there is significantly less capital for these majority Libyan owned companies to use to grow their business. Also, less investment and less capital means less international expertise and experience brought into the Libyan economy,” they argue.
“One must not forget also that in the vast majority of joint ventures, the foreign partner actually contributes capital disproportionate to their shareholding. In other words, they often fund the Libyan partner. If a foreign investor can only own 49%, then they are unlikely to invest. International companies often have internal policies about whether they can or cannot hold minority interests. Additionally, if they put most of the money into an enterprise, they will inevitably want some control of how it is spent and invested. If they can’t get this comfort then they probably won’t invest. International investors have plenty of global opportunities. They don’t have to come to Libya.
Foreign partners also often bring with them expertise, governance, controls, frameworks, strategies, new products, and services which are all needed in Libya.
A 51/49 rule will also be detrimental to the smaller, newer, entrepreneurial and ambitious Libyan business, not the established Libyan business. Larger Libyan businesses can already afford to invest in enterprises themselves and have less need for a technical foreign partner that is also able to bring in capital.
Young Libyan start-up businesses cannot do this and will be at a disadvantage to the current “economic elite” that already control much of the private sector in Libya.
“If the government wants to retain the 51/49 rule, the analysts say, perhaps it could consider what Dubai has done. In Dubai, the 51/49 rule still prevails (although there is intense speculation that this may change in the future). Given the fact that Dubai is very keen to attract FDI, a rule has been implemented that says that although the shareholding percentages must be 51/49, it is possible for the JV partners to register a disproportionate dividend entitlement, effectively allowing the foreign partner, in practice, to secure an economic interest of 80%.”
Accordingly, these notes are important and must be given further consideration by the authorities in Libya and especially the drafting committee in the National Congress. Also the economic national interests need to be protected and a balance to be struck.