Energy & Infrastructure M&A 2024 Comparisons

The current wars in Ukraine and Gaza, along with regional instability, have slowed Egypt’s energy and infrastructure M&A market. However, local mitigants have had a direct positive impact on foreign currency availability, such as the decision of the Central Bank of Egypt (CBE) to devaluate the Egyptian Pound in March 2024 and the government’s heavy investments in energy and infrastructure projects, particularly transport and logistics and sovereign investments, including the transaction concluded with the government of Abu Dhabi’s sovereign fund in relation to Ras El Hekma. Prior to this, the conversion and repatriation of profits had been an issue negatively affecting M&A appetite.

There are also positive sectoral developments, particularly with regard to power. Additional mitigating factors include the government’s policy direction to divest material power generation assets, coupled with the issuance of P2P regulations by the Egyptian Electric Utility and Consumer Protection Regulatory Agency (EgyptERA) introducing the first phase of a competitive power market.

For acquisitions, investors typically establish a holding company in an offshore jurisdiction, to benefit from favourable tax treatment in terms of a bilateral investment treaty; the holding company would then acquire the relevant Egyptian target or establish a subsidiary in Egypt to absorb its assets. Egyptian companies undertaking energy and infrastructure projects would typically take the form of a joint stock company, the incorporation process for which can take up to ten business days, subject to having all required documents in good order. In principle, the minimum capital required to establish a joint stock company is EGP250,000, but a higher capital may be required depending on the sector, zone (eg, free zones) and bid/tender documents.

Whilst the Egyptian corporate system encompasses numerous corporate vehicles, a joint stock company is generally the most prevalent, used and recommended corporate form due to, inter alia:

• regulatory requirements, such as those applicable to electricity generation and distribution, banking activities or insurance activities;
• its management structure being preferred by the investors (which includes a board of directors);
• the possibility to pay the share capital over five years (as opposed to limited liability companies, which shall be paid in full upon incorporation); and
• its shareholders’ limitation of liability as their exposure is limited to the value of their shares (as opposed to limited and joint partnerships/corporations, which are based on personal considerations).

Early-stage financing sources largely depend on the sector and the activity. Fresh start-ups in the technology space would generally obtain venture capital financing from a combination of both local and foreign investors, whilst new entities acquiring an existing business can obtain external financing from banks and financial institutions, whether acquisition finance and/or project financing.

Venture capital (VC) funding in Egypt is primarily driven by international VC funds, although a few local funds are available. While government-sponsored funds exist and have nominal participation, the bulk of funding comes from foreign VC funds.

Egypt does not have its own standardised VC transaction documents. Instead, widely recognised documents like those from the British Venture Capital Association and the National Venture Capital Association are commonly used. Many Egyptian start-ups are structured to operate at a holding company level in foreign jurisdictions such as Delaware (US), the Netherlands and the DIFC/ADGM (UAE).

As start-ups grow (typically at Series B+ funding stages), it is common for them to relocate their headquarters abroad. Initially, most start-ups in Egypt begin as limited liability companies and often transition to joint stock companies as they expand and mature.

Investors looking for a liquidity event in a start-up are currently opting for a sale process at the outset, while an IPO is only considered at a later stage.

Typically, a company would be more likely to list its shares on its domestic exchange and more reluctant to pursue a dual listing, either to avoid incurring additional obligations (including obtaining the required approvals from the competent authorities in the home country and the relevant foreign country) or due to the uncertainties and risks of the listing process on a foreign exchange.

The feasibility of a future sale for an Egyptian company listed solely on a foreign exchange will depend on the regulations governing the specific jurisdiction in which the company seeks to list. Typically, the foreign exchange may require the company to be listed in the home country first. Generally, the Egyptian Exchange (EGX) listing rules regulate the listing of Egyptian companies on the EGX and companies that opt for a dual listing.

If the company is dual listed, it must ensure compliance with the laws and regulatory requirements of both exchanges. In this respect, the EGX listing rules do not impede the feasibility of a future sale for dual-listed companies.

Generally, the sale process as a liquidation event is typically undertaken via conducting direct negotiations between the selling shareholder and the potential buyer (and possibly by having a bid process). Such direct negotiations are typically thereafter documented by way of a binding offer extended by the potential buyer, which is then followed by the drafting of the relevant transaction documents.

A typical transaction structure for the sale of a privately held energy and infrastructure company that has VC investors, after three to five years from the investment by the VC investors, would be to initiate an initial public offering or undertake a full exit to either a financial or strategic investor. In less frequent cases, and more specifically in the form of share swap transactions with large strategic companies, the VC investors may opt to sell the majority of their stake and maintain a minority stake in the target company.

In most M&A transactions, the sale shares are typically acquired by the buyer in consideration of cash payable to the sellers. However, the sale of shares in a company in exchange for shares owned by the buyer in another company or in the buyer vehicle itself is legally permissible in the context of both private and public M&A, subject to the applicable laws governing such transactions. The buyer may also opt to acquire the shares via a capital increase, subject to the transaction structure and the target company's needs.

Representations and Warranties

Representations and customary core and business warranties are contractual protections granted by the relevant seller (and also by the individual founders in some cases, or by the target company in the case of a capital increase) to the buyer under the relevant transaction documents. A breach of such representations and warranties would grant the buyer adequate rights to recourse through a claim for compensation for breach of contract, notwithstanding any time or financial limitations as commercially agreed between the parties. Investors typically provide core warranties under the transaction documents.

Escrow and Holdback Structures

Whilst purchase price holdbacks are typically used in M&A transactions to offset any potential liabilities and claims post-closing, indemnity holdbacks are not customary in M&A.

Indemnities

The share and purchase/subscription agreement typically includes a full-fledged tax indemnity covering any and all potential tax liabilities identified in the tax due diligence or otherwise. Business indemnities are typically also included to the extent there is a risk identified under the due diligence that may result in a claim being initiated against the target company for the period arising prior to closing. Generally, indemnities shall not be subject to limitations, although the principals may agree otherwise.

Representations and Warranties Insurance

Representations and warranties insurance has been suggested (particularly by the seller) in several recent transactions, but it is not commonly used in Egypt.

There are either regulatory or contractual requirements for the investors to incorporate a special purpose vehicle (SPV) for most energy and infrastructure projects. In other instances, the investors opt for such SPV structure in light of anticipated external fundraising and related security over the company’s assets. The desire is thus to ringfence the project’s assets under one vehicle so as to limit security and potential enforcement over such assets. Consequently, most projects are developed by an SPV from the outset, so spin-offs are uncommon. However, the initial shareholders may divest all or part of their shares in the SPV, subject to applicable regulatory approvals and the lapse of any contractual lock-ups.

The primary tax implications expected from spin-off/demerger transactions are as follows.

Capital Gains Tax (CGT)

A demerger that is considered a change in the legal form of the company necessitates the valuation of the company's assets to facilitate the separation of assets. If this valuation results in realised capital gains, the company will be subject to CGT at a rate of 22.5% on the realised gains.

In that sense, and according to Article (53) of the Income Tax Law No 91 of 2005 (the ITL), capital gains resulting from the revaluation of assets are subject to taxation when there is a change in the legal form of a legal entity.

The ITL allows for the possibility of deferring the CGT liability under specific conditions, including:

• book value of assets and liabilities – the legal entity may defer the CGT if it records its assets and liabilities at their book value as of the date of the change in legal form, for tax calculation purposes; and
• depreciation and reserves – the depreciation of assets, as well as the carry-forward of provisions and reserves, must continue to be calculated according to the rules in place before the change in legal form.

The deferred tax becomes payable if there is any further change in the legal form of the entity, or if the entity is dissolved for any reason.

Stamp Duty Tax and State Development Fee

The Stamp Duty Tax Law No 111 of 1980 imposes several stamp duty taxes. Any contract is subject to a nominal stamp duty tax at the rate of EGP0.9 for each page of the contract, with such nominal tax to be borne by the party that uses its counterpart in Egypt.

With respect to fees, according to Article (1) paragraph 9 of Law No 147 of 1984, a state development fee of EGP2 is imposed on each and every tax base that is subject to stamp duty tax of an amount equal to EGP0.5 or more.

Offshore mid-layer option

From an Egyptian tax perspective, a spin-off could potentially avoid direct tax implications in Egypt if it occurs at an offshore mid-layer that does not directly affect the Egyptian entity’s shareholders. However, this should be assessed from a tax perspective in the jurisdiction of the spin-off.

Undertaking a sale of shares after the completion of a spin-off is possible in Egypt to the extent there are no statutory or contractual lock-up requirements. The applicable regulations regulating spin-offs are as follows.

• The Companies Law defines a demerger as the separation of an existing company’s assets, activities, liabilities and ownership rights (“Parent Company”) into two or more companies (“Resulting Company”), whether vertically or horizontally.
• The Companies Law differentiates between two types of demergers:
1. in a horizontal demerger, the Resulting Company should have the same shareholding structure and percentages as the Parent Company; and
2. in a vertical demerger, the Resulting Company is affiliated to and owned by the Parent Company.
• The Resulting Company may exist in any legal form (except for sole shareholder companies), irrespective of the legal form of the Parent Company.
• The Resulting Company is deemed a legal successor of the Parent Company and shall legally replace it in all its obligations, liabilities and rights within the limits and in respect of the transferred rights and obligations. The approval of the creditors of the financing instruments issued by the Parent Company shall be obtained prior to proceeding with the demerger process, subject to regulations under the applicable laws.
• Whether the demerger is horizontal or vertical, the split of the assets and any liabilities thereof should be based on the book value, unless the General Authority for Investment and Free Zones (GAFI) approves any other valuation method. The shareholders’ rights in the capital, reserves and retained earnings are split in accordance with the Parent Company’s extraordinary general assembly meeting resolution approved by ¾ of the capital.
• As a result of the demerger, the Parent Company issues new shares based on the value of its net assets remaining after the demerger, via either amending the number of shares or changing the share’s par value, while the Resulting Company issues new shares in light of the value of the assets allocated and assigned to it.
• The shares of the Resulting Company may be transferred upon issuance without being subject to restrictions, without prejudice to any existing restrictions.
• The corporate documents of the Resulting Company and the Parent Company should be amended to reflect the changes to each entity resulting from the demerger (eg, capital and shareholders).

Typically, no prior approval from the tax authority is required. However, it is possible to apply to the Egyptian Tax Authority to obtain the tax ruling of the main tax treatment of the spin-off in Egypt. Obtaining such a ruling usually takes about three months, although this may differ depending on the circumstances.

Acquisition of a Stake Prior to Offer

Acquiring a stake in a public company is legally permissible prior to making an offer, provided the stake does not trigger the thresholds of mandatory tender offers (MTOs) stipulated under the Executive Regulations of the Capital Market Law No 95 of 1992, as amended (“Capital Market Law”), as outlined in 6.2 Mandatory Offer.

Reporting Thresholds and Timing

The acquirer of a stake in a public company is subject to certain disclosure/reporting requirements, including the following.

• In MTOs, the offeror must promptly notify the Financial Regulatory Authority (FRA) and the EGX that a tender offer is likely to be triggered. Such tender offer notice should be submitted in certain events, including the disclosure by the offeror of its intent to acquire the shares of the target company (“Announcement”) or the fulfilment of the conditions triggering the submission of a tender offer.
• Generally, the main shareholders of a listed company shall the following disclose to the FRA:
1. their shareholding stake along with that of their related parties upon the acquisition of a stake representing 5% or multiples thereof of the company’s shares or voting rights, provided that such disclosure shall be made after the execution of the transaction and before the first trading session post-execution; and
2. their shareholding stake along with that of their related parties, periodically, at the beginning of January and July of each year.

Buyer’s Plans/Intentions Regarding the Target Company

The acquirer of 25% of a public company’s share capital or voting rights (whether solely or together with its related parties) shall submit an investment plan and their intentions in connection with the company’s management to the EGX and FRA.

Put Up/Shut Up Requirement

After announcing intent, the offeror has 60 business days to submit a tender offer draft to the FRA, extendable by another 60 days at the FRA's discretion. Failure to submit within this timeframe restricts the offeror from making a new offer for six months after the elapse of the respective periods, although exemptions may apply. Similarly, if the offer is withdrawn, a new offer is prohibited for six months from the withdrawal date.

Pursuant to the Executive Regulations of the Capital Market Law, the thresholds and events triggering the launch of an MTO are as follows:

• acquiring one-third or more of the issued share capital or the voting rights of the target company, directly or indirectly whether individually or through related parties;
• a person/entity owning more than one-third of the issued share capital or the voting rights of the target company, individually or through its related parties, and less than 50% of the issued share capital or the voting rights must submit an MTO if its shareholding or voting rights increase by more than 5% within 12 consecutive months;
• a person/entity owning more than 50% of the issued share capital or the voting rights of the target company, individually or through its related parties, and less than two-thirds of the issued share capital or the voting rights must submit an MTO if its shareholding or voting rights increase by more than 5% within 12 consecutive months;
• a person/entity owning more than two-thirds of the issued share capital or the voting rights of the target company, individually or through its related parties, and less than 75% of the issued share capital or the voting rights must submit an MTO if its shareholding or voting rights increase by more than 5% within 12 consecutive months; and
• the shareholding of a person/entity reaches 75% of the share capital or voting rights of the target company, independently or through its related parties.

The acquisition of listed shares may take place through any of the following transfer mechanisms.

• Open market mechanism – transactions involving the acquisition of a shareholding stake not exceeding one-third of the share capital or the voting rights of a listed company may be executed through the open market mechanism by placing a buy order through a broker licensed by the FRA.
• Block trade mechanism – transactions involving the acquisition of a shareholding stake not exceeding one-third of the share capital or the voting rights of a listed company may be executed through the block trade mechanism. Block trading is intended for transactions that are large in size, and takes place via special software prior to the commencement of the official trading session.
• Launching an MTO – if the thresholds and events triggering the thresholds are satisfied as outlined in 6.2 Mandatory Offer, the acquisition of listed shares must be conducted via launching an MTO for the acquisition of up to 100% of the share capital of a target company.
• Mergers of listed companies are regulated under the Capital Market Law, although they are used as a transaction structure less frequently. It is noteworthy that the execution of merger transactions is exempted from the submission of an MTO.

Technology industry transactions typically combine cash and stock-for-stock elements, specifically with strategic investors.

Pursuant to the Companies Law, a merger transaction can take place through the merger of two or more companies into an existing company or through the merger of two companies to form a new company. That said, mergers do not include a cash component.

Generally, there is no minimum price requirement for a business combination. However, public M&A have pricing restrictions, including the following, without limitation.

• Block trades – the block trading execution price should be within the limits of the price movement percentage permitted for the relevant security. Pursuant to EGX Decree No 681 of 2021, the pricing limit is 20% of the last closing price of the main market.
• MTOs – in the context of MTOs, the Executive Regulations of the Capital Market Law set out the below restrictions:
1. the FRA may reject the draft MTO or request its amendment if the offered price for actively traded shares does not meet the thresholds listed in6.13 Securities Regulator's or Stock Exchange Process;
2. the MTO execution price shall not be less than the highest price paid by the offeror or its related parties in an MTO in the 12 months preceding the submission of the MTO; and
3. for inactive shares, an independent financial adviser (IFA) shall determine the fair market valuation of the shares (FMV).

In transactions with high valuation uncertainty, buyers may opt to adopt an adjustment mechanism whereby a preliminary purchase price is paid by the buyer at closing and adjusted (upwards or downwards) thereafter according to the agreed upon adjustment mechanisms. Typically, in the event of upwards adjustments, the seller shall be entitled to additional cash; in the event of a downwards adjustment, the buyer may be granted additional shares.

Shareholders’ Acceptance

In principle, MTOs shall not be conditional on any requirement. In exceptional cases, and subject to the FRA’s approval, the MTO may be conditional on the acquisition of at least 51% of the target’s share capital for the purpose of gaining control of the target company, or 75% of the target’s share capital for the purpose of a merger.

Transaction Execution

Generally, in the case of a takeover offer/tender offer, the closing of the underlying transaction is contingent on certain conditions, which vary from one transaction to another, subject to due diligence findings and commercial agreements. Such conditions mainly include obtaining the necessary regulatory and contractual approvals.

Takeover offers and business combinations are usually documented by the relevant transaction documents (eg, share purchase agreements or subscription agreements).

Target Company Obligations

The target company’s obligations are determined on a case-by-case basis, depending on the transaction and its structure. Such obligations may include obligations to procure the fulfilment of certain actions, a completion obligation (eg, in the event of a subscription), etc.

Representations and Warranties

It is not typical to include representations and warranties in public M&A, although the parties may elect otherwise.

In principle, MTOs shall not be conditional on any requirement. In exceptional cases, and subject to the FRA’s approval, the MTO may be made conditional on the acquisition of at least 51% of the issued share capital of the target company for the purpose of gaining control of the target company, or 75% of the issued share capital of the target company for the purpose of a merger.

Minority squeeze-outs are generally not recognised under Egyptian law.

On the contrary, Article 357 of the Executive Regulations of the Capital Market Law grants a buy-out right for minority shareholders. If a shareholder acquires 90% or more of the company’s capital and voting rights, minority shareholders holding at least 3%, or a group of 100 shareholders representing 2% of the free-floating shares, may request the FRA to compel the majority shareholder to submit an offer to purchase their shares.

Financing Requirement

The MTO draft and the information memorandum draft submitted to the FRA by the offeror shall include a letter of commitment from a licensed bank confirming that the funding of the MTO is available, whether the payment of the purchase price is based in any way on the financial resources of the target company and the consequences of said financing structure on the target company’s assets and activities.

Identity of the Offeror

The offer shall be submitted by the buyer or its representative.

Conditionality of the Takeover

A takeover offer may not be conditional on the offeror obtaining financing, as outlined in 6.5 Common Conditions for a Takeover Offer/Tender Offer.

Customarily, the protection measures that a target company may grant include break-up fees, non-solicitation provisions, information rights and exclusivity periods.

The statutory governance rights a bidder can obtain would depend on the percentage acquired in the company’s share capital (control over the ordinary or extraordinary general assembly meetings, etc). However, contractual rights depend on the commercial agreement and ownership percentage. For minority acquisitions, reserved matters requiring the bidder’s prior consent are common, along with other customary minority protections such as a tag-along right in future exits. Bidders acquiring a majority stake may be granted control over the board of directors accompanied with other contractual protections as applicable.

It is common to obtain irrevocable commitments from principal shareholders of the target company to tender or support the transaction. Such undertakings are contractual in nature and may trigger the principal shareholder’s liability if they tendered their shares for a better offer submitted by another offeror.

However, the undertaking/commitment is merely contractual, and the principal shareholder may still opt to back out from the transaction, regardless of the contractual liability.

Review of the MTO Draft

The FRA reviews the MTO draft within two business days of the submission thereof by the offeror. The FRA can either approve, reject or request additional information, documents or amendments of the MTO draft (“Requested Information”). Upon receipt of the Requested Information, the FRA shall issue its decision on the MTO draft within two business days of receipt.

Approval of the Offer Price by the FRA

Unless the offer price is determined by the FMV issued by an IFA, the FRA may reject the MTO draft or amendments if the offered price for actively traded shares is below the highest of:

• the average closing price on the EGX within the six months preceding the MTO draft submission or the three months preceding the announcement of the offeror’s intention to submit an MTO; or
• the highest tender offer price submitted for the same security within the preceding 12 months.

Timeline of the Tender Offer

In principle, the MTO duration shall not exceed 30 business days.

Extension of the MTO Duration

The MTO duration shall commence on the business day immediately following the publication of the MTO (“Commencement Date”). The MTO duration shall not exceed 30 business days (except for the case of competing offers) and shall not be less than ten business days. However, if the target company is obliged to appoint an IFA, the MTO duration shall not be less than 20 business days from the Commencement Date.

Timeline for Obtaining Regulatory Approvals

Typically, regulatory approvals are obtained prior to launching the offer. In this respect, the offeror must notify the FRA and the EGX that an MTO is likely to be triggered in case of submission of requests by the offeror to the relevant authorities to obtain their preliminary approvals on the envisioned acquisition.

Incorporating a new company in the energy and infrastructure industry is generally subject to the general regulations applicable to the establishment of companies. The licensing requirements, process and timeline necessary prior to the commencement of operations would vary depending on the nature of the project. Typically, an environmental approval from the Egyptian Environmental Affairs Agency would be required. For energy projects, the generation, distribution and/or sale of electricity requires a licence from the Egyptian Electric Utility and Consumer Protection Regulatory Agency.

The primary securities market regulator in Egypt is the EGX.

Restrictions on Foreign Investment

Generally, foreigners can participate in the ownership of Egyptian companies, pursuant to the applicable Egyptian laws. There are, however, specific activities that trigger foreign ownership restrictions, including the following.

• Companies undertaking commercial agency activities should be fully owned and managed by Egyptians.
• Projects operating in specific areas inside the Sinai Peninsula require at least 55% of their shareholding to be held by Egyptian nationals.
• Any company owning desert lands must be at least owned by 51% Egyptian nationals and an individual shall not own more than 20% of the capital. Moreover, any Arab country national may be given reciprocal treatment (equal to that of Egyptian nationals) with respect to the ownership of the desert land, by virtue of a presidential decree upon obtaining the approval of the Cabinet Ministers.
• Companies undertaking activities of safeguarding and transport of funds (ie, physical transport and safeguarding) must be fully owned by Egyptian nationals or by companies that are fully owned by Egyptian nationals.

Foreign Direct Investment Filing

All Egyptian companies with foreign shareholders or board members are required to submit a form to GAFI including information on, inter alia, foreign shareholders and financial information no later than 45 days before the end of each quarter (and no later than 30 days in the event of any changes to the company). Failure to submit the required information to GAFI is punishable by a fine not exceeding EGP50,000, as per Article 91 bis of the Egyptian Investment Law. It is worth noting that such penalty has not yet been implemented in practice.

National Security Review

Foreign shareholders and foreign director or non-director delegates (individuals or entities) shall obtain security clearance from the security authorities before being appointed as a shareholder or director in any Egyptian company. The security clearance process is conducted through GAFI by submitting a designated form along with notarised and legalised corporate documents. GAFI then contacts the security authorities to obtain their clearance. In most cases, the appointment can proceed prior to clearance (which usually takes a considerable time), but the individual will be replaced if the result of the security clearance is negative.

Export Control Regulations

Exportation is primarily governed by Law No 118 of 1975 regulating importation and exportation. Companies undertaking exportation activities are bound by certain obligations, including the obligation to register with the Exporters’ Register held by GOIEC, the competent authority at the Ministry of Trade and Industry.

Pursuant to the Egyptian Competition Law No 3 of 2005 (ECL), any transaction must be filed with the Egyptian Competition Authority (ECA) and approved prior to its closing if the following requirements are satisfied.

The Transaction Involves an “Economic Concentration”

The amendments to the Competition Law (“Amendment(s)”) and its executive regulations (“Amended ER”) define “Economic Concentration” as any change in the control of a person or several persons resulting from a merger or from direct or indirect acquisition of the capacity to control a person(s) by virtue of an agreement or through the purchase of financial securities, assets, shares or any other means.

Furthermore, the Amendment introduced a definition of “Control” to be, inter alia, the capacity of a person(s) to exercise effective influence on another person by guiding the economic decisions of said person either based on the majority of the voting rights or based on the capacity of the controlling person to prevent another person from taking an economic decision (veto rights), or any other method.

“Material Influence” is also broadly defined under the Amendment and the Amended ER to include the ability of a person to affect the policies of another person, directly or indirectly, including but not limited to its strategic decisions or commercial objectives. The Amended ER provides for a non-exhaustive list of cases where material influence takes place, according to which a person (A) shall have a material influence of another person (B) in any of the following cases:

• A acquires 25% or more of the total voting rights, quotas or shares of B;
• A acquires less than 25% of the total voting rights, quotas or shares of B, if other factors that would influence the policies of B are in place, including the following in particular:
1. the voting rights enjoyed by A in B in comparison to the voting rights of the other shareholders in B enable A to have an influence on B’s policy or commercial objectives; or
2. B's Articles of Association, the shareholders' agreement pertaining to the management of B or other documentation grants A privileges such as special voting rights or veto rights.

In all cases, material influence is not achieved if A holds less than 10% of the total voting rights, quotas or shares of another person, unless A shall be one of the three largest shareholders or quota-holders of B after completion of the envisioned transaction.

Financial Thresholds

The envisioned transaction must satisfy one of the following financial thresholds.

• Threshold no 1 consists of two sub-thresholds that must be satisfied collectively, as follows:
1. local threshold in relation to all parties concerned parties – the achieved combined annual turnover or the combined assets in Egypt pertaining to the parties concerned of the last year as reflected in their audited consolidated financial statements pertaining to such year exceed EGP900 million; and
2. local threshold in relation to each of at least two of the concerned parties – the aggregate turnover of each of at least two of the parties concerned achieved in Egypt, as reflected in their latest audited consolidated financial statements, exceeds EGP200 million.
• Threshold no 2 consists of two sub-thresholds that must be satisfied collectively, as follows:

1. worldwide threshold – the worldwide combined annual turnover or combined assets pertaining to the parties concerned of the last year, as reflected in their audited consolidated financial statements pertaining to said year, exceed EGP7.5 billion; and
2. local threshold – the aggregate turnover of at least one of the parties concerned achieved in Egypt, as reflected in its latest audited consolidated financial statements, exceeds EGP200 million, the Executive Regulations refer to at least one of the concerned parties, but the Guidelines issued by the ECA state that said local threshold is applicable to the target’s consolidated audited turnover, and not the acquirer.

According to the provisions of the ECL, transactions (eg, acquisitions, mergers and joint ventures) that involve target companies that carry out activities subject to the supervision and control of the FRA are not subject to the prior approval of the ECA. However, the parties of the economic concentration are obliged to notify the FRA of the economic concentration, and the FRA must consult the ECA for its opinion before approving the implementation of the economic concentration. The envisioned transaction must satisfy the above requirements in order to be subject to the competition approval of the FRA.

Failure to notify the ECA or to obtain its clearance will subject the parties to a fine not less than 1% and not exceeding 10% of the total annual turnover, the asset value of the parties concerned or the transaction value, whichever is higher. If the percentage cannot be calculated, the penalty shall be a fine of not less than EGP30 million and not more than EGP500 million. In addition, the transaction documentation shall be deemed null and void, and the parties shall reverse the transaction.

To the extent an envisioned transaction meets the ECA filing requirements, the issuance of the ECA unconditional approval is to be included as a condition precedent in the relevant transaction documents, as the ECA pre-merger regime is suspensory.

The Common Market for Eastern and Southern Africa (COMESA) Competition Commission

Transactions that satisfy specific requirements must be notified to the COMESA Competition Commission (CCC). COMESA has 21 member states, including Egypt. The ECA does not consider filing a transaction to the CCC as a one-stop shop, so the parties will still have to notify the transaction to the ECA and obtain its prior approval to the extent applicable.

Filing deadline

If a transaction is notifiable, the filing of CCC notification must be made no later than 30 calendar days after the decision to merge. In practice, the “decision to merge” is normally interpreted to refer to the execution of the relevant transaction document. For the avoidance of doubt, the “decision to merge” does not refer to completion of a transaction. If the parties have entered into a binding term sheet, the 30-calendar day deadline will begin from the date on which the binding term sheet is signed. However, if the term sheet is not binding, except for the standard binding clauses that are restricted to confidentiality, exclusivity and dispute resolution clauses, the CCC filing, if applicable, must be made within the timeline indicated above.

Filing fees

Notification of a transaction must be accompanied by a fee calculated at 0.1% of the combined annual turnover or combined value of assets in the COMESA of the parties to a merger and their related parties, whichever is higher, provided that the fees will not exceed USD200,000. Once paid, the filing fees are not refundable if the transaction does not complete.

Penalty for failure to notify the transaction to the CCC

According to Article (24) of the COMESA Competition Regulations, any notifiable merger that has been carried out without notifying CCC within the required timeline will:

• have no legal effects, and no rights or obligations will be imposed on the participating parties; and
• be punished by a fine that may not exceed 10% of either or both of the merging parties’ annual turnover in the COMESA, as reflected in the accounts of any party concerned for the preceding financial year.

Acquirers should consider various labour-related matters, including but not limited to the following.

• Companies are required to maintain comprehensive employee records whilst ensuring that no employee’s salary falls below the statutory minimum wage, as adjusted. Upon exceeding a certain number of employees, companies are required to hire individuals with disabilities at a rate equivalent to a percentage of their total workforce. If foreign nationals are employed, they must hold valid work permits.
• Employees and board members must be covered by social insurance, and companies must submit annual proof of insurance to the National Organisation for Social Insurance.
• Several regulations must be adopted and ratified before the competent authorities. In addition, contributions must be made to statutory funds subject to differing requirements, including the Universal Health Insurance Authority. Companies must also establish a ratified Occupational Health and Safety committee, ratified work injury reports and a ratified emergency plan.
• It should be highlighted that the role of the works council is relatively advisory in nature and, accordingly, they are not legally entitled to impose obligations on employers. Disagreements are usually resolved through negotiations and mediations.

Currency Control Regulations

There are currently no foreign exchange controls applicable in Egypt.

Conducting Due Diligence on Banks

Conducting due diligence on banks requires obtaining the prior approval of the CBE’s board of directors.

The Acquisition/Merger of Banks

The Egyptian Banking Law and the relevant regulations issued by the CBE require any person, legal entity and related parties that intend to acquire more than 10% of the issued share capital or the voting rights of a bank (or any merger of a bank) to obtain the pre-approval of the CBE’s board. The appointment of key officials – namely, the chair and board members – requires the pre-approval of the CBE governor.

Power purchase agreements and project and finance documents would generally be subject to arbitration and not local courts. For energy projects where the government is the offtaker, new approvals have been put in place, to agree on international arbitration. In terms of policy, EgyptERA's recently issued regulations have installed Egypt’s first P2P schemes, opening up the market as contemplated by Law No 87 of 2015. The P2P regulations have not yet been sufficiently tested, but are expected to be another substantial catalyst for the power market.

Generally, potential investors may only conduct due diligence on the company’s public information (eg, general assembly meeting minutes, summary of board meetings, periodical and financial statements and public disclosures). Pursuant to applicable laws, due diligence on non-public information requires the target company to disclose to the EGX the existence of a contemplated transaction and to convene a board meeting to approve furnishing non-public information to the potential investor and/or its adviser.

The primary law on data protection is the Data Protection Law No 151 of 2020 (the “Data Protection Law”), which has not yet been put into effect in practice. As such, if the due diligence process involves the collection or processing of personal data, then the provisions and licensing requirements set out under the Data Protection Law would apply.

Tender offers shall be disclosed to the EGX and the FRA by the offeror, the target company and the main shareholders holding more than one-third of the target’s share capital (the “main shareholders”), as follows.

• By the offeror – disclosure that an MTO is likely to be triggered (the “MTO Notice”) is required if:
1. the offeror has made the announcement and has notified the target thereof;
2. the conditions triggering the submission of an MTO are fulfilled;
3. preliminary acquisition approvals are sought from authorities; and/or
4. rumours or unusual stock activity indicate a potential tender offer.
• By the target company – disclosure is required if, inter alia:
1. the target company was notified by the offeror of its intent to launch an MTO;
2. binding or non-binding memorandums of understanding or letters of intent or similar agreements have been signed;
3. a non-binding or binding agreement for conducting due diligence on the target company has been signed; or
4. serious negotiations about a potential MTO take place.
• By the main shareholders – disclosure is required if:
1. one of the requirements triggering the submission of the MTO Notice by the target company set forth above in the previous point is satisfied; and/or
2. such shareholder enters into a (binding or non-binding) agreement(s) with the offeror, which has not been disclosed to the target company.

A prospectus is only required by companies undertaking an initial public offering; stock-for-stock takeover offers and business combinations do not require the preparation of a prospectus.

The buyer’s shares do not need to be listed on a domestic or foreign stock exchange.

Generally, bidders are not required to produce financial statements in their disclosure documents in a transaction. Financial statements of Egyptian companies shall be prepared according to the statutory template prescribed by applicable laws according to the Egyptian accounting standards and audited by a registered auditor.

The parties are not obliged to file the transaction documents per se, but certain regulators may require a copy of the transaction documents or a summary thereof.

No specific directors’ duties are imposed for the purpose of business combinations per se. Such duties are usually determined on a case-by-case basis, as further elaborated on in 11.3 Board's Role.

However, the directors’ general duties under the Companies Law apply throughout their tenure. To elaborate further, directors are responsible for managing the company and carrying out all necessary activities to achieve its purpose while adhering to the following duties, inter alia.

• Company representation – the chair or CEO represents the company before courts. The authorities and signatory powers granted to board members shall be explicitly set out under the articles of association and commercial register.
• Devotion of time – directors in a joint stock company shall devote their time to the company, and shall not, on a permanent basis, take on executive roles in other joint stock companies without prior general assembly approval.
• Non-compete duties – directors shall refrain from engaging in commercial activities for personal benefit or for the benefit of others, in any of the company’s business sectors, unless authorised by the general assembly.
• Fiduciary duties – directors shall act in good faith, fairly, honestly and impartially towards all shareholders, and in the best interests of the company, ensuring no prejudice to the rights of third parties. Courts have ruled that directors act as agents of the company.
• Transparency and disclosure duties – directors shall disclose any conflict of interest related to a transaction presented to the board and ensure it is recorded in the meeting minutes, and shall refrain from voting on conflicted matters.
• Confidentiality duties – directors shall refrain from exploiting or disclosing any of the company’s confidential information.
• Periodic reporting – directors shall prepare an annual financial report to be presented at the ordinary general meeting, which is open to scrutiny by shareholders.
• Regulatory compliance – as legal representatives/agents, directors shall comply with all applicable laws and regulations relevant to the company’s business.

Generally, unlisted companies are not subject to any statutory requirements to establish board committees; this is usually determined on a case-by-case basis in private M&A transactions, particularly those involving financial investors. Shareholder agreements typically include an obligation to form board committees (eg, advisory, audit, risk and HR and remuneration committees), to ensure adequate investor representation.

Whilst there are no statutory provisions regulating the involvement of committees in the event of a conflict of interest, the board of directors may define committee responsibilities to include specific mechanisms to address situations, notwithstanding the statutory disclosure requirement and voting prohibition stipulated in 11.1 Principal Directors’ Duties.

For listed companies and companies undertaking non-banking financial activities regulated by the FRA, there are statutory requirement to establish committees, as follows.

• Listed companies – the EGX listing rules require listed companies to form an audit committee comprised of an odd number of non-executive board members (at least three), with a majority being independent directors including the committee chair. The audit committee, inter alia, reviews internal controls and auditor’s reports.
• Companies undertaking non-banking financial activities – pursuant to FRA Decree No 100 of 2020, as amended (“FRA Governance Rules”), companies undertaking non-banking financial activities are required to form:
1. an audit committee (as detailed above);
2. a risk committee comprised of at least three board members, with the majority being non-executive and independent – the risk committee shall be responsible for, inter alia, managing non-strategic risks;
3. a governance committee comprised of at least three independent and non-executive board members, which shall be responsible for, inter alia, evaluating the governance system and developing internal policies, with duties delegated to the audit committee; and
4. additional committees (eg, remuneration, compliance, IT), which can be formed at the board's discretion and may include executive or expert non-board members.

Involvement in Negotiations

There is no specific requirement for board members to be actively involved in negotiations nor to limit their role to recommending a transaction; this is typically left to the determination of the selling shareholder, who may appoint a board member or other representative to negotiate.

Shareholder Litigation

Litigation from shareholders challenging the board's recommendation regarding an M&A transaction is uncommon, as such recommendations are generally advisory and do not oblige shareholders to sell their shares nor respond to an offer.

In the context of M&A transactions, directors customarily seek independent advice from legal, tax and financial advisers until the transaction’s successful closing.

Fairness opinions are legally required in certain cases, including the following, without limitation.

• For a capital increase in listed companies, insurance companies and companies undertaking the activity of establishing entities that issue securities or increase their capital, an FMV report must be prepared by an IFA accredited by the FRA, to determine the FMV of the shares.
• For a capital increase in unlisted companies, the FMV can be determined by an IFA, as outlined above, or can be based on a study conducted by the company for this purpose, under its own responsibility. This study must be accompanied by an auditor's report in accordance with Egyptian auditing standards.
• The FRA may require a listed company to submit an FMV as prepared by an IFA if there is a price change in one direction amounting to more than 50% within a period of time not more than three months or amounting to more than 75% within a period of time not more than six months, which is not consistent with the market and/or sector indicators if there is no material information justifying such change.
• In the event of a share swap between two companies or launching a share swap or mixed mandatory tender offer.
• In the event of a mandatory tender offer, whereby:
1. the shares of the target company are not actively traded on;
2. the offeror and/or its related parties own 20% or more of the shares of the target company; and
3. the offeror is a board member or a senior manager of the target company.