Acquisition Finance in Egypt is mostly dominated by banks and in particular the National Bank of Egypt and Banque Misr, which have been leading banks in Egypt and Africa for the past several years. We note however that if the acquirer is a foreign entity, it is not uncommon for the acquirer to resort to the foreign banks they are accustomed to working with.

Despite a slight dip in the total volume of M&A activity in FY 2022, with 243 deals totalling USD9 billion, compared to 242 deals worth USD8.2 billion in FY 2021, Egypt maintains a relatively active M&A market in the region. Most of the deals were inbound investments dominated mostly by Saudi Arabia via its Sovereign Wealth Fund and the United Arab Emirates, rather than Egyptian companies concluding transactions abroad. Further, we note that private equity has been growing steadily in Egypt for the past 20 years, as demonstrated by the fact that many M&A deals were mostly led by private equity firms, whether local or foreign, instead of corporates.

The Egyptian market has been significantly affected by the war in Ukraine and the substantial devaluation of the Egyptian pound. On the one hand, the high interest rates in the US and in Europe have driven a significant number of indirect investments out of the country. The amount of indirect investments is estimated at USD25 billion. On the other hand, the uncertainties surrounding the devaluation of the Egyptian pound have led to many transactions not being completed due to disagreements regarding target valuation and transaction consideration.

The governing law used in the documentation depends on the nationality of the parties involved. If all parties are Egyptian, then the governing law will always be the Egyptian law. However, if one of the parties is a foreign bank, then the governing law will most likely be English law. However, if English law applies to the documentation, but the security is Egyptian, Egyptian law will apply to the extent relating to the security.

It is common practice in Egypt to draft facility agreements based on the Loan Market Association (LMAs). However, said documents are always adapted to Egyptian law, especially if the parties are Egyptian. In fact, established Egyptian law firms have played a significant role in adapting these documents to meet local requirements. However, certain small and mid-sized loan facilities are based on Egyptian laws.

The language used in financing documentation depends on the governing law as well as the parties involved. If the governing law is English law, the financing documents will be drafted in English. Nonetheless, some security documents establishing a registerable security should be in the Arabic language. 

In typical acquisition finance in Egypt, opinions regarding the validity and enforceability are usually issued on behalf of the lenders. It is also possible to request a capacity and authority opinion.

Senior loans are typically used as part of a syndicated facility irrespective of the nationality of the parties or the governing law of the documentation. Egyptian banks typically take collateral from the borrower and the target to secure the senior loan.

Mezzanine financing structures are common in the Egyptian market and are typically used in acquisition finance and buyouts. Common mezzanine financing structures are mezzanine loans which typically mature within 5 years and are convertible into equity if the borrower is in default. This also applies to real estate/property mezzanine loans which are used to finance the development costs of a project. Such loans are usually unsecured but have other restrictive covenants such as non-borrowing and negative pledge. Other common mezzanine financing structures are issuance of bonds which are convertible into equity. Payment-in-kind (PIK) loans are less popular due to the risk they pose and are not common in the Egyptian market as the Egyptian market is highly regulated.

Bridge loans are typically used as a short-term solution to provide the borrower with financing until the borrower secures the syndicated facility.

Even though Egyptian corporations are allowed to issue bonds, in practice it is very rare. Bond issuance is usually fully underwritten by banks or financial institutions. In recent years, the issuance of sukuk in the Egyptian market has also become a way to raise financing, with the most recent sukuk issued by the Egyptian government.

Offering of equity shares of an Egyptian company, whether through capital increase or secondary offering by existing shareholders to new investors, is commonly used in the Egyptian market for raising funds and injecting capital in a company. The most common structure is through capital increase, subject to the approval of the regulator and the corporate capital increase procedure. The concept of loan notes is not recognised in Egypt. Alternatively, Egyptian companies can issue bonds (including convertible bonds) as the most common type of debt instruments in the Egyptian market.

Asset-based financing is very common in Egypt in the field of project finance. Egyptian banks would typically assess the loan based on the value of the assets.

A typical intercreditor agreement in Egypt regulates the relationship between the lenders and their respective rights and obligations in relation to a syndicated loan agreement. However, the details of the documentation will depend on the nature of the parties involved, the governing law, the location of the security and the classes of lenders. That said, it is common to see clauses such as seniority and subordination and restrictions on taking enforcement actions. 

In large acquisition finance or high value transactions, the financing package may consist of loans and bonds as well as a bridge loan if the bonds are not issued on the closing date. The loans are usually syndicated and heavily secured while the bridge loan is often unsecured. The bonds would also be issued as unsecured and unsubordinated debt instruments ranking lower than the secured loans.

Hedge counterparties are the most likely parties to intercreditor agreements (ICA). Following the assumption of the ICA, they do not need to be senior lenders. 

Types of Securities

The types of securities used in Egypt for general insurance and specifically for acquisition finance are regulated through several laws and codes, including the Egyptian Civil Code, the Egyptian Trade Law, the Movables Securities Law and the new Central Bank of Egypt Law. Securities under Egyptian law cover a broad spectrum (movables, immovables and commercial pledges) and lenders typically demand the perfection of the following securities.

Pledge over movables

A pledge over movables is the most common form of security. According to the 2015 Movables Securities Law No 115, the Financial Regulatory Authority (the FRA) established the Egyptian Collateral Registry (the ECR), a centralised electronic register that maintains declarations of security rights on movables (such as current and future receivables, current accounts, deposits and equipment). Article 6 of the said law provides that perfection of a pledge over movables shall be made by notarising the pledge over movables by filing the electronic form and fulfilling all the formal requirements, namely: submitting a copy of the mortgage agreement, and providing a description of the pledged movable, the parties to the pledge agreement, the pledgee’s relationship with the pledged secured asset and the term of the pledge.

Real estate pledges

Real estate pledges are generally perfected via a written pledge agreement, registered at the real estate public notary; the ownership of the real estate must already be registered at the real estate public notary. Also, real estate pledges must be registered with the competent notary public where the real estate is located. Foreign banks and international financial institutions might have to fulfil a number of additional requirements for ratification before the notary public, such as submitting incorporation documents.

Business undertaking (fonds de commerce) pledges

While the process remains largely the same as real estate pledges with regards to registration with the relevant notary public, foreign banks and international financial institutions require prior approval from the Central Bank of Egypt before perfecting the pledge. Once obtained, and once the pledge has been registered at the notary public, a charge is inserted on the company’s commercial register.

Share pledge

It is common for lenders to take security of shares through a share pledge agreement, which must be registered with the Misr for Central Clearing, Depository and Registry (MCDR), the entity responsible for the central depository of shares in all Egyptian joint-stock companies, whether listed or unlisted. The MCDR must be notified of the share pledge so that it inserts a charge with the share pledge on MCDR’s records. The MCDR further requires that all related parties must be registered with the Egyptian Stock Exchange (EGX) to facilitate the sale of shares in the event of a default or triggering event by the pledgor.

Assignment of rights and assignment of receivables

Security can be taken over contractual rights by way of assignment (such as an indemnity rights agreement, or an assignment of insurance proceeds) or through an assignment of receivables. The assignment of rights and assignment of receivables must be perfected through the execution of an assignment agreement between the assignor and the assignee, acknowledged by the debtor. As an alternative to the debtor’s acknowledgment, the law permits a notification of the assignment to the debtor via an official notice through court bailiff.

Account pledge agreement

Under the Movables Securities Law, bank accounts and deposits may be pledged as security for a debt. Pledges over account receivables must be registered electronically with the ECR, fulfilling the same requirements as apply to a pledge over movables.

See 5.1 Types of Security Commonly Used.

The process of registering and perfecting securities under Egyptian law largely depends on the type of security. With the establishment of the ECR, a large number of securities are now registered electronically provided they fulfil the formal requirements set out in Article 6 of the Movables Securities Law, including pledges over movables and account pledge agreements.

• Real estate pledges must be made in writing, and subject to Egyptian law in accordance with the universal principle of sovereignty. The real estate pledge must be made in writing and notarised at the competent real estate notary public.
• Share pledge agreements must be registered with MCDR through the notification of the pledged share so that MCDR’s records are updated with the charge.
• Assignment of rights and assignment of receivables are generally perfected through the acknowledgement or notification of the debtor of the assignment of rights or receivables between the assignor and assignee. The law does not require a specific registration, nor does it require a specific form for notification; notification, however, is commonly made by registered mail or via an official notice through the court bailiff.
• Business undertaking (fonds de commerce) pledges require, for foreign banks and international financial institutions, a prior approval of the Central Bank of Egypt and, subsequently, a notarisation at the competent notary office. Finally, a charge must be inserted on the pledgor’s commercial register.

Egyptian law does not provide for a statutory restriction on upstream security, whereby a subsidiary guarantees the debts of its parent company. Provided that corporate procedures and approvals have been strictly followed, upstream securities may be undertaken. The only statutory restrictions on company decisions are that (i) the founders of a company, as well as its directors, shall not enter into related-party transactions within five years from the date of incorporation, unless permitted by the general assembly; (ii) related-party agreements do not promote the interests of the company; and (iii) company loans or guarantees are not provided to any of its directors.

While the principle of financial assistance is most commonly used, locally and internationally, within the banking sectors, whereby central banks may financially assist licensed banks facing failure, the new Insolvency Law has created a protective composition procedure whereby the trader facing financial distress during the composition stage may resort to such procedure to secure financial assistance, provided that the trader (i) has enjoyed the status of trader for at least the last 2 years; (ii) has a working capital of no less than EGP1 million; and (iii) did not commit fraud.

There is no applicable information in this jurisdiction.

Security Enforcement Procedures

While security enforcement procedures largely depend on the nature and class of the assets, the Egyptian Commercial Code has outlined an enforcement framework for enforcement of a commercial pledge that cannot be deviated from by agreement of the parties, without prejudice to any provisions addressing specific types of pledges.

Commercial pledges

The pledgee must first request payment of the secured debt, usually by registered mail or via an official notice through the court bailiff.

Should the pledgor fail to pay within five days from the said notice, the pledgee may apply to the enforcement judge for a full or partial sale order for the pledged asset. The sale of the pledged asset through public auction shall not take place until after five days from the notification of the enforcement judge’s sale order to the pledgor, indicating the location, date and time of the public auction.

Business undertaking (fonds de commerce) pledges

The pledgee may petition the enforcement judge requesting the sale of the pledged asset through public auction eight days from the date of notification of the pledgor (by registered mail or via an official notice through the court bailiff) requesting payment of the secured debt. The enforcement judge will set a date and time for the sale of the pledged assets at a public auction.

Real estate pledges

The Civil and Commercial Procedure Code provides a framework for enforcement on real estate, whereby the pledgor must first notify the pledgee of the default in payment of the secured debt and register a charge against the secured asset at the relevant notary public. Should the default persist following the notification, the secured asset shall be sold at a public auction.

Share pledges

According to the latest amendment of the Central Depository Law, foreign lenders may now enforce pledged shares without requiring a prior executive order, court judgment or the lapse of a certain time period. The pledgee must first request payment of the secured debt (by registered mail or via an official notice through the court bailiff). Should the pledgee fail to make payment within five days from the pledgor’s notice, the pledgee may apply to the enforcement judgement for a sale order for the pledged asset. Following the issuance of the sale order, the pledgor is granted a final deadline of five days, after which the secured asset will be sold at a public auction, unless the sale order provides otherwise.

Bank account pledges

The pledgor may enforce on pledged bank accounts to set off any outstanding amounts owed by the pledgor to the pledgee. The pledgor’s right to a set-off must be undisputed prior to the application for set-off.

Corporate guarantees are commonly used in Egypt. Most often, they are granted by a parent company to a subsidiary debtor to guarantee its debts under a financing. The guarantor’s general assembly must, however, approve the guarantee and delegate a director to execute the guarantee. In addition to the corporate resolutions, the guarantor must enter into a written agreement or execute an acknowledgment guaranteeing the debt through a tripartite agreement between debtor, guarantor or lender, or through the execution of corporate guarantee that shall be annexed to the loan agreement.

The restrictions on company-related transactions are the same as those mentioned in 5.4 Restrictions on Upstream Security.

Generally, no guarantee fees are payable. Should a guarantee require registration, minimal administrative fees may be payable.

According to the 2018 Insolvency Law No 11, the court to which an insolvency petition has been submitted, sets the date of the trader’s insolvency; otherwise, the trader shall be considered insolvent from the date of the court judgment.

Following the court’s judgment, all the trader’s debts are accelerated and become due, and all creditors with securities over the trader’s movable or immovable property may enforce their securities.

Any acts committed by the trader following the insolvency date that aim at extending unlawful benefits to debtors or harming debtors are unenforceable. The Insolvency Law outlines several scenarios where this applies:

• the insolvent trader grants any kind of donations, except for small gifts;
• the insolvent trader repays a debt prematurely, irrespective of the nature of the payment;
• the insolvent trader repays a debt in a manner other than that agreed upon; and
• the insolvent trader extends any kind of pledge or contractual collateral, as well as real estate allocation of rights over the debtor’s assets, to secure a pre-existing debt.

However, any act committed by the insolvent trader from the insolvency date, if the act is harmful to the debtors and the beneficiary of the harmful act is aware of the trader’s insolvency, may be enforceable, upon confirmation from the bankruptcy trustee.

Aside from the scenarios discussed in 7.1 Equitable Subordination Rules, any party seeking the annulment of a harmful act committed by an insolvent trader during the insolvency period must apply to the courts. The general requirements regarding standing and interest provided in the Civil and Commercial Procedure Code must be met.

Stamp tax is governed by two main legislations: Stamp Tax Law No 111 of 1980 and its executive regulations issued by virtue of Minister of Finance Decree No 525 of 2006. There are two types of stamp tax:

• nominal stamp tax; and
• proportionate stamp tax.

The nominal stamp tax is imposed on a variety of documents, such as contracts, and is determined based on the number of papers. The proportionate stamp tax is levied based on the value of the transactions.

The annual proportionate stamp tax is set at a rate of 0.4%, due on a quarterly basis and payable by lenders. Although levied exclusively upon lenders, the proportionate stamp tax is borne by both lenders and borrowers equally.

The most recent amendments to the stamp tax legal framework took place in 2020 and 2022. Stamp tax law was significantly amended as a result of the coming into effect of Unified Tax Procedures Law No 206 of 2020, and then slightly amended by virtue of Law No 3 of 2022.

Withholding tax regulations, relevant to interest payments, are specified under Income Tax Law No 95 of 2005 and its executive regulations as issued by Minister of Finance Decree No 991 of 2005.

Withholding tax is levied at a rate of 20% to interest payments made by taxable entities, including Egyptian entities or non-resident entities which maintain a permanent establishment in Egypt, to foreign and/or non-resident lenders.

However, loan and credit facility returns, obtained by the government, local administrative units and other public legal persons from foreign or non-resident entities shall be exempt from withholding tax. In addition, other legal persons, including public and private sector entities, may also be exempt from the aforementioned tax, under the condition that the term of such loan or facility is three years or more.

In addition to the foregoing, Egypt has over 50 Double Taxation Treaties (DTT) currently in effect. As such, any DTT which provides relief from double taxation and applies a lower withholding tax rate or total exemption shall be applied.

According to the Income Tax Law and its executive regulations, thin-capitalisation rules limit the deduction of interest expenses incurred by an Egyptian company that has been financed through excessive debt. Thin-capitalisation rules dictate that the debt-to-equity ratio of an entity is 4:1. Accordingly, the law disallows the deductibility of interests on loans and advances if such loans and advances are in excess of fourfold the equity average, calculated in accordance with legally mandated Egyptian accounting standards. In other words, any interest expense that exceeds the predetermined limit shall be disallowed for tax purposes and shall be added back to the taxable income of the company. This rule is aimed at preventing companies from using excessive debt to shift profits to low-tax countries. It is important to note that thin-capitalisation rules apply to both domestic and foreign related-party debt alike.

Some merger and acquisition transactions require the obtainment of a regulatory authority’s prior approval before implementation. The requirement for regulatory approval depends on the nature of the transaction and the industry involved.

In general, regulatory approval is necessary for transactions that involve a change of control or ownership of a regulated entity, such as a financial institution, a telecommunications company, or a utility company. Regulatory approval may also be necessary for transactions involving a foreign buyer or seller, particularly if the transaction involves national security or other sensitive issues. It is important to note that the specific regulatory requirements and approval processes for each transaction will vary significantly depending on the sector/industry in which the regulated target practices its commercial activities and the competent regulatory authority.

The acquisition of listed companies is governed by Capital Markets Law No 95 of 1992 and its executive regulations No 135 of 1993 along with Listing Rules issued by the Egyptian Stock Exchange, which are continuously being amended to keep pace with the growing global market of mergers and acquisitions.

An acquisition of listed entity’s shares or an entity which has made a public offering involving its shares can either be done through open market transactions or by submitting a voluntary or mandatory tender offer (MTO) depending on certain thresholds. Chapter 12 of the aforementioned executive regulations indicates that the purchaser may be required to submit an MTO if the transaction envisages the acquisition of more than one third of the target’s share capital or voting rights whether directly or indirectly through its affiliates. The acquiring entity must submit the tender offer as well as an information memorandum outlining acquisition objectives, information on the traded security, the purchaser’s financial statements, the acquirer’s investment plan for the (12) months following the acquisition along with other documents as provided under Article (335) of the executive regulations to the Financial Regulatory Authority. It is worth noting that there are some cases where an MTO is not required such as capital restructuring among related parties and/or group companies.

According to the Central Bank of Egypt’s (CBE) regulatory instructions, which apply to any bank operating in Egypt, financing banks in mergers and acquisition transactions abide by certain restrictions and the fulfilment of various requirements prior to their involvement in such transactions.

In light of the foregoing, banks are required to engage experienced and reputable legal and financial advisory firms for the purpose of undertaking both a legal and a financial due diligence process relevant to the target company. Banks are then required to conduct their own financial analysis studies in light of the due diligence process’s findings, as well as prepare their own internal evaluation report relevant to the transaction in question.

Furthermore, although not a mandatory legal obligation, banks may also, at their own discretion, engage third parties experienced in the economic sector in which the target company operates for the purpose of verifying their own valuations.

In addition, financing banks may not finance more than 50% of the transaction’s value without obtaining the CBE’s prior approval.