Cash flow and capital: An overview of corporate law and recent reforms

While the law provides for a wide variety of corporate structures, most companies are joint stock companies, governed by Law 17-95, as amended, or limited liability companies (LLCs) governed by Law 5-95, as modified. Joint stock companies are required to have no less than five shareholders and a minimum capital of Dh300,000 (€26,670), or Dh3m (€266,700) if listed on the Casablanca Stock Exchange. The management of a joint stock company may take two forms.

STRUCTURE: The first form of joint stock companies consists of a single board of directors having between three and 12 directors (and up to 15 if the company is listed), which appoints a managing director to the company. The second company structure includes a board of no more than five directors (or seven if the company is listed on the Casablanca Stock Exchange) appointed and monitored by a supervisory board, which also appoints one director as managing director. LLCs are required to have between one and 50 shareholders, and until recently to have minimum capital of Dh10,000 (€890) placed in a blocked account. One or more individuals can be appointed to manage the company.

CAPITAL REQUIREMENT: On June 30, 2011, Law 24-10 abolished the Dh10,000 (€890) minimum capital requirement applicable to LLCs. This amendment may strongly encourage foreign investors and entrepreneurs to create companies, thus potentially bringing innovative products and services into Morocco.

This reform will indeed stimulate the creation of small and medium-sized enterprises and redress the anomaly whereby many small businesses are unable to become structured due either to an inability to raise the minimum capital of Dh10,000 (€890) or to run their business successfully where such a relatively large amount is required to be placed in a blocked account.

Further, Law 24-10 cancelled the obligation for LLCs to deposit the capital of the company in a blocked account during the creation of the company. At the time of writing, this obligation to deposit the capital in a blocked account only applied in instances where the capital is higher than Dh100,000 (€8890). Regarding recent business law reforms, the main recent change was brought by Law 34-10 which mandates companies to settle invoices within (i) 60 days when no payment delay has been agreed upon between the seller and buyer, or (ii) no later than 90 days when the companies agreed on a period longer than 60 days.

This amendment will enable goods and services providers to secure payment in a prompt manner. It will also accelerate the finalisation of local transactions and thus improve the economy. By mandating the businesses to pay for purchased goods or services within a maximum 90-day timeframe, the legislature is strongly encouraging the innovation and development of new financial products by investors and especially by banks.

CASH FLOW: One key aspect of the business of large corporations today is the management of their cash flows as a means of obtaining alternative financing other than debt or equity financing. With shorter payment terms (as stated, a maximum of 90 days) applicable to companies, banks will indeed be more inclined to offer treasury solutions to large local companies, and especially factoring products.

Based on recent experiences with our clients, large businesses and banks are both willing to have recourse to factoring; i.e., a financial transaction whereby a company sells its accounts receivables (i.e., invoices) to a bank at a lower price than the original value of the said receivables. Also, besides the trade of account receivables, factoring may also be used as a credit tool for businesses. In such a scenario, the bank, instead of purchasing receivables to a creditor at a lower price as mentioned above, will advance the money owed by a client-debtor by paying the creditors of the bank’s client directly and perceive interests. This sort of factoring allows businesses to face cash flow difficulties.

Thus, even though the importance of the legislative amendment on payment terms appears insignificant at first glance, the consequences of this change might in fact prove efficient for local business in the long run.