The M&A market has continued its growth trend that began in 2017, with foreign investment increasing steadily since the decision of the Central Bank of Egypt to float the Egyptian pound in November 2016. Foreign investors are more confident of their availability to repatriate dividends and exit proceeds, and are encouraged by the attractive valuations of Egyptian assets and businesses. They are also encouraged by positive macroeconomic trends, the stabilisation and strengthening of the Egyptian pound and the abundance of foreign reserves.
However, the COVID-19 pandemic has started to impact the Egyptian M&A market due its unforeseen effects on the global and local economies. Currently, due to uncertainties concerning the impact of the pandemic, whether on the Egyptian economy as a whole or particular sectors or businesses, numerous transactions have either put on hold, aborted or slowed-down. This is particularly the case for transactions involving financial investors due to valuation uncertainties. Strategic mergers and acquisitions are less impacted as the rationale for such transactions is usually driven by financial as well as non-financial factors.
Last year witnessed a higher volume of transactions compared to the previous year with more activity in small-to-medium size transactions (ie, USD5 million to USD25 million).
The key industries continue to be in mainly defensive sectors that are not affected by macroeconomic or political trends: health, education and FMCGs. In addition, the agricultural export sector, benefiting from the devaluation of the Egyptian pound, became a very attractive sector. The non-banking financial sector is also very attractive due to growing demand for different kinds of financing. These sectors are among the least impacted by the COVID-19 pandemic, and are hence expected to continue witnessing more activity during 2020.
The most common technique for acquiring a company is an equity acquisition (whether primary, secondary or mixed; and whether full ownership or majority acquisition). Asset acquisitions are less common and are only resorted to in special circumstances, especially in case of significant negative due diligence findings, particularly in relation to potential tax liabilities.
The primary regulators for M&A activity in Egypt are:
Foreign ownership restrictions exist for some activities that include, among others, commercial agency, importation and civil aviation, as well as activities undertaken in the Sinai Peninsula.
The applicable antitrust regulation in Egypt is the Egyptian Competition Law No 3 of 2005 and its Executive Regulations (as amended) (the Competition Law), in addition to the circulars issued by Egyptian Authority for the Protection of Competition and the Prohibition of Monopolistic Practices (the Egyptian Competition Authority). Currently, the applicable regime is based on post-transaction notification rather than pre-transaction approval. However, the Egyptian Competition Authority has been recently expanding its jurisdiction and scrutinising strategic acquisitions potentially threatening competition.
Egyptian Labour Law No 12 of 2003 (as amended) (the Labour Law) and its executive decrees issued by the Ministry of Manpower regulate labour and employment matters. The most important aspects of the Labour Law are the restrictions on the ability of the employer to dismiss employees (especially those employed on an indefinite basis) and the financial consequences of unjustified dismissal. It should also be noted that, subject to company type and capitalisation, most Egyptian companies are under an obligation to pay their employees a 10% profit share out of distributed dividends capped at the total annual payroll.
Generally, the acquisition of shares or quotas by foreigners, whether individuals or corporations, in companies incorporated in Egypt requires conducting security checks. These are often routine and do not have an impact on the transaction timeline. It should be noted that security checks are more restrictive in case of the acquisition of companies undertaking activities in the Sinai Peninsula or undertaking certain types of activities (eg, non-banking financial services).
There have been significant reforms within Egypt over the last few years, including:
Chapter 12 of the Executive Regulations of the CM Law, regulating takeovers of public companies, has been recently amended. No significant amendments are expected in the near future. It should be noted that Chapter 12 regulates public companies only and there are no similar regulations for private companies.
The practice in this regard is mixed. However, pre-offer stakebuilding is less common. The stakebuilding strategy, applicable only below mandatory tender offer triggering thresholds, is acquiring shares through open market transactions. It should be noted that voluntary tender offers, although less common, are also permissible below mandatory tender offer-triggering thresholds. The above pertains to public companies subject to Chapter 12. For private companies, stakebuilding is irrelevant, since transactions are not public in nature.
Chapter 12 permits the acquisition of up to one third of the share capital or voting rights of public companies through open market transactions or voluntary tender offers. However, a notification requirement is applicable in case of the acquisition of 5% or multiples thereof of the share capital or voting rights (and 3% and multiples thereof in case of the acquisition by board members). There is a notification requirement applicable at the 25% threshold, requiring the acquirer to disclose any future intentions.
A mandatory tender offer requirement (to acquire up to 100% of the capital or voting rights in case of the intention to delist or 100% less the percentage required to maintain listing in case of the intention to maintain the listing) is applicable in the following circumstances:
Chapter 12 regulates public companies only. There are no similar regulations for private companies. However, certain regulatory approvals or notifications may be required for private companies depending on their activities and regulators.
Chapter 12 provisions are mandatorily applied on all publicly listed companies. It is a requirement for listing on EGX that the articles of association do not include restrictions on transfer. It is common for publicly listed companies to be majority owned and/or controlled by a single entity, which makes hostile takeover almost impossible. However, this does not preclude stakebuilding. As for private companies, there is more flexibility to introduce special provisions in the articles of association or in a shareholders’ agreement.
Dealing in derivatives is allowed. They are not explicitly prohibited, and are often perfected through non-Egyptian special-purpose vehicles. However, it should be noted that the provisions of Chapter 12 and the Listing Rules are applicable on a direct and indirect basis. As noted previously, the CM Law has been recently amended to introduce a new chapter that regulates futures exchanges. However, this is a fairly novel change that is yet to materialise.
There are no specific filing/reporting obligations for derivatives under the Competition Law. The provisions of Chapter 12 and the Listing Rules are applicable on a direct and indirect basis.
There is a notification requirement applicable at the 25% threshold requiring the acquirer to disclose any future intentions, especially regarding future investment strategy, approach towards management, and whether it intends to reach the one-third threshold. This is only applicable for public companies subject to Chapter 12.
Pursuant to Chapter 12, the target is obliged to notify EGX and the FRA of the potential transaction when it is first notified/approached, when a memorandum of understanding or letter of intent is signed, when due diligence commences, when a definitive or non-definitive agreement is signed, when serious negotiations commence, and also when it becomes aware of information that may materially impact the pricing or trading of the stock, in each case in relation to a potential tender offer.
The same applies to the majority owner(s) of the target company where he or she enters into agreements with the potential acquirer that the target company is not aware of, but the notification requirement is to the FRA only in this instance. The above is only applicable for public companies subject to Chapter 12.
Market practice on timing of disclosure does not differ from legal requirements.
The scope of due diligence varies, depending on the parties and the target company(ies). The scope of due diligence typically covers legal, financial, tax and technical matters. In certain exercises, environmental, social and governance, plus compliance issues are covered. Most transactions only involve high level due diligence with a focus on key red flags. Full and detailed due diligence investigations are becoming rare and are often requested when the acquirer intends to seek financing from a financial institution to fund the acquisition.
Note that the scope of due diligence on a publicly traded company is often restricted to publicly available information and selected material (if any), and in some instances a vendor’s due diligence report is provided. The same applies for highly regulated competitive processes pertaining to private companies, which are still not very usual in Egypt.
Exclusivity is more common. Both standstills and exclusivity are often requested by acquirers, and are either accepted or rejected depending on the dynamics of the transaction, especially how attractive the target is.
It is both permissible and common to conclude a conditional sale agreement or a promise of sale, which is disclosed to the FRA and consequently to the market.
The timeframe for the completion of the acquisition or sale of a business in Egypt varies according to the type of business, the scope of pre-transaction restructuring and due diligence, and the nature of the regulatory approvals required. The typical timeframe is three to twelve months, with the average transaction concluding in six months.
A mandatory tender offer requirement (to acquire up to 100% of the capital or voting rights in case of the intention to delist or 100% less the percentage required to maintain listing where the intention is to maintain the listing) is applicable in the following circumstances:
These only apply to public companies subject to Chapter 12.
Cash is more common than shares as consideration in M&A deals involving both private and public companies.
Voluntary tender offers are less common in Egypt. As per Chapter 12, a mandatory tender offer can only be conditional on the acquisition of 75% in case of a purchase with the intention to merge and 51% otherwise, and in each case with the approval of the FRA. This only applies to public companies subject to Chapter 12.
The 51% acceptance condition is permissible and very common, and it is highly relevant to ensure control. The 75% acceptance condition is permissible but rare as it is only relevant for a purchase with the intention to merge (it should be noted that a merger requires 75% of the vote in an Extraordinary General Assembly of Shareholders). This only applies to public companies subject to Chapter 12.
This is only permissible in case of a target(s) that is not publicly listed. Chapter 12 requires the potential acquirer to present proof of funding to the FRA.
Break-up fees and non-solicitation provisions are the common deal security measures in Egypt. Force-the-vote provisions are irrelevant because the decision to sell is an investment decision left to shareholders. Match-rights provisions may be agreed but subject to the provisions of Chapter 12 regulating competitive tender offers (if applicable).
Mandatory tender offers are made to acquire up to 100% of the capital or voting rights where the intention is to delist, or 100% less the percentage required to maintain listing in case of the intention to maintain the listing. Therefore, in case of mandatory tender offers on public companies subject to Chapter 12, there is no flexibility with regards to the stake sought. However, acceptance remains an investment decision for the shareholders.
The key aspect that potential bidders seek to secure, regardless of the type of company, is controlling the Ordinary General Assembly of the Shareholders that elects the board, and which is definitively controlled with a 50% plus one share majority and (potentially a lower stake in case of a disbursed shareholding structure of a public company). Therefore, it is both permissible and common for mandatory tender offers to include a 51% acceptance condition. As for private companies, investors seeking a majority stake or a significant minority stake, can regulate board representation or other minority/governance and management rights and include them in the articles of association or a shareholders’ agreement.
Shareholders’ agreements can now be binding on joint stock companies as per a recent amendment to the Companies Law. Those techniques are not available for public companies and investors can only rely on the minority protections and corporate governance rules under the Companies Law and the Listing Rules.
In Egypt, shareholders are able to vote by proxy, however, this is subject to a cap of 10% of the total share capital and 20% of the total shares present in the relevant General Assembly meeting.
Squeeze-out mechanisms and short-form mergers are not recognised under Egyptian law. As such, no mechanism is available to compulsorily acquire minority stakes. However, with the non-distribution of dividends, it is very common to increase the stake over time while observing the free-float requirement to maintain the listing of the company according to the Listing Rules, and observing the thresholds stipulated under Chapter 12 so as not to trigger a subsequent mandatory tender offer requirement. It is also common to delist the shares post-offer, which entices the shareholders to accept the sale of their shares if announced when the offer is made, or through the voluntary delisting offer rules stipulated in the Listing Rules if the delisting decision is taken afterwards.
A conditional sale agreement or a promise of sale, which is disclosed to the FRA and consequently to the market, is extremely common and includes an irrevocable commitment to tender, subject to a competitive tender offer not being submitted and accepted by the FRA. The negotiations are typically carried out before the tender offer is submitted to the FRA and published.
Chapter 12 tightly regulates the process and timeline for approving and announcing tender offers pertaining to publicly traded companies. The draft tender offer is announced by EGX as soon as the FRA accepts receiving the draft. Once the FRA accepts the draft tender offer, it is also announced by EGX. Announcements by EGX are made through trading screens. The acquirer should also publish the tender offer within two business days from acceptance by the FRA. Typically, this is made through publication in newspapers.
The issue of shares by a private company does not require a disclosure. However, the issue of shares by a publicly listed company is regulated by the Listing Rules, which require a special disclosure form to be submitted by the board to the FRA, prior to the board inviting the General Assembly to consider approving the issue. Subject to the obtaining the FRA’s approval of the disclosure form, EGX publishes the form prior to commencing share-issuing procedures.
Financial statements are only required in a non-cash tender offer made pursuant to Chapter 12, in which case a summary is required for the previous three years or from the date of establishment, whichever is shorter. Financial statements for Egyptian entities need to be prepared in accordance with the Egyptian accounting standards.
Transaction documents are to be disclosed to the FRA, and a summary of them is published as part of the tender offer documentation.
In general, directors owe a fiduciary duty to the company and its shareholders to act in the company’s best interest, and may be held liable for breach of such fiduciary duty. As they owe a duty of care to the company, by extension they owe a duty of care to all stakeholders. However, with very few exceptions, only the shareholders and government regulators have recourse against the directors.
While sub-committees are permitted and encouraged or required pursuant to applicable laws and regulations, special or ad hoc committees in relation to a merger are not common. However, it is usual for the board to hire investment/financial and other advisers in connection with a potential transaction. The applicable laws and regulations include specific provisions with regards to avoiding conflicts of interest at the board level.
There is no established court practice in takeover situations. However, as per Chapter 12, the board is required to hire an independent financial adviser to provide an opinion on the tender offer, if the acquirer or its related parties own 20% or more of the shares of the target business, or if the acquirer is a board member or senior manager of the target business. Thus, in takeover situations, except in the above circumstances, the assumption is that the board members are independent and can exercise their business judgement. However, it should be noted that in Egypt the decision to sell or tender shares is an investment decision that is left to the shareholders entirely. The opinion of the board or the assessment of the independent financial adviser (if applicable) is not binding on the shareholders and is only intended to guide their investment decision.
As per Chapter 12, the board is required to hire an independent financial adviser to provide an opinion on the tender offer, if the acquirer or its related parties own 20% or more of the shares of the target or if the acquirer is a board member or senior manager of the target company. Furthermore, in general, the boards of private and public companies commonly hire investment/financial and other advisers in connection with a potential transaction.
There are almost no judicial precedents regarding conflicts of interest. However, there is a precedent where concerns over the "independence" of an "independent financial adviser" were raised before the FRA, which prompted the FRA to clearly define the independence criteria.
Hostile tender offers are permissible under Chapter 12. However, they are extremely rare as most public companies are majority owned and/or controlled by a single entity.
The scope of action of directors of private companies is rather wide, and they can take whatever measures they deem fit as long as they do not conflict with their general fiduciary duties. However, defensive measures would not be necessary in the context of a transaction involving a private company because a single shareholder or group of related shareholders who control the board dominate most private companies.
The directors of public companies are restricted and cannot, pursuant to Chapter 12, take any action during the tender offer period that is materially adverse or outside the ordinary course of business. Directors are particularly prohibited from consummating an issue of shares or convertible bonds that would make the potential acquisition onerous or impossible unless the decision to issue was taken 30 business days or more before the FRA approved the tender offer. Directors are also explicitly prohibited from disposing of material assets, incurring material liabilities or taking actions that hamper the development of the company’s activity.
The most common defensive measure taken in respect of a private company is ensuring in its articles of association a specific board composition. This makes controlling the board only possible with the acquisition of a two-thirds majority, which is the majority required to amend the articles of association via a decision of the Extraordinary General Assembly of Shareholders.
The most common defensive measure in respect of a public company is for the board to issue a non-binding negative opinion concerning the proposed tender offer. This is not particularly effective, since the decision to sell or tender shares is left to the discretion of the shareholders.
The scope of action of directors of private companies is wide, and directors can take whatever measures they deem fit as long as they do not conflict with their general fiduciary duties. As for public companies, their directors are restricted and cannot, pursuant to Chapter 12, take any action that is materially adverse or outside the course of business during the tender offer period. They are particularly prohibited from consummating an issue of shares or convertible bonds that would make the potential acquisition onerous or impossible, unless the decision to issue was taken 30 business days or more before the FRA approved the tender offer. They are also explicitly prohibited from disposing of material assets, incurring material liabilities or taking actions that hamper the development of the company’s activity.
As noted above, the decision to sell or tender shares is left to the discretion of the shareholders. The board may issue a non-binding negative opinion concerning the proposed tender offer, which may affect the investment decision of the shareholders. However, for both private and public companies, they cannot block a transaction.
Arbitration is the common dispute resolution mechanism in M&As in Egypt. It is worth noting that in many instances, especially transactions involving foreign investors, the transaction documents are governed by foreign, especially English, law. In general, disputes regarding M&As are not very common, and are typically settled by way of amicable negotiations.
Almost all disputes relating to M&A deals take place post-closing of the deal, with the main issues being warranty and indemnity claims and disagreements on governance and management between the shareholders.
Activism is not very common in Egypt. This is due to the fact that most public companies are majority owned and/or controlled by a single entity. Furthermore, there are limitations on voting by proxy. However, with the introduction of cumulative voting and pro-rata board representation to the Listing Rules, it is likely that activism will be possible in the future.
It should also be noted that minority shareholders are rather active in ensuring mandatory offer rules are applied and, further, that they are applied on the basis of a fair valuation, resulting in proper exit opportunities for them.
Activism is not very common in Egypt. Therefore, there are no noticeable trends in this regard.
Activism is not very common in Egypt. Therefore, there are no noticeable trends in this regard.
The Egyptian economy has faced years of stagnation since the 2011 revolution, with increasing expenses, shortages of foreign currency, and trade deficits coupled with reduced economic and business growth and significant inflation. Given these severe circumstances, the business atmosphere has not been encouraging for foreign direct investment (FDI). The M&A climate has been adversely affected and investors have, in the past, had concerns due to several factors, including the difficulty of repatriating their dividends due to a lack of foreign currency.
The Egyptian government has adopted a comprehensive economic reform programme, where the floating of the Egyptian pound and reviewed fiscal and monetary policies are all key pillars for the improvement of the economic situation. By maintaining ambitious and bold fiscal policies, supported by the recent legislative reforms, Egypt has recently succeeded in attracting and increasing its FDI. These steps taken by the Egyptian government have done much to improve the country’s business environment and investment atmosphere, building an effective legal and economic infrastructure for various business sectors, while removing many bureaucratic hurdles that have in the past delayed mandatory governmental procedures and curtailed business opportunities. Recent numbers and economic indicators show an improvement in all aspects of business and the outlook is very promising. Ongoing co-operation between different government institutions and the effective implementation of recent regulatory reforms, all following a trend of expansion in more diversified business sectors, will be key factors for the attraction of more foreign direct investment, in addition to local investment prospects.
M&A projects and restructuring have also been progressing within this promising atmosphere. The support of international financing institutions like the IFC, the EBRD, the ICD, the ARAB Fund and the Bank of America certainly gives local and foreign investors additional comfort, which in itself has had a positive effect on M&A within the Egyptian market.
In fact, since 2015 the Egyptian Cabinet has substantially reformed the Egyptian economy, endeavouring to optimise the investment climate for both local and foreign investment, and the devaluation of the Egyptian pound has acted as a competitive incentive for foreign investors to invest and expand their business in Egypt. For these reasons, the Egyptian House of Representatives, has recently enacted and amended a set of legislation in many economic sectors. The major economic sectors that were affected by the legislative reform were, inter alia, healthcare, education, telecoms, natural resources and financial services. This has led the market expectation of more M&A transactions in these sectors. The legislative reform has also provided further measures to protect minority shareholders. This was internationally observed in the World Bank’s Doing Business in Egypt 2020 report, as Egypt advanced 15 ranks on the 2020 minority investors protection index, ranking 57th instead of 72nd in the 2020 report, the said report stated.
Attracting foreign investors requires earning their trust and reassuring them that their entry and exit from the Egyptian market will be smooth and profitable. Accordingly, the Egyptian legislature and the government have had to work hand-in-hand in addressing foreign investors’ concerns.
Most, if not all, investors are attentive to, inter alia, the applicable tax regime, ease of repatriation of funds, bureaucracy and the level of corruption in the country in which they are considering investing.
It is worth noting that the recent legal reforms took place mainly: (i) to address foreign investors’ concerns; and (ii) to render the Egyptian market attractive to local and foreign investment. In this article, we will shed light on the most recent significant legal reforms affecting businesses and the M&A legal framework in Egypt despite the lack of clarity resulting from the possible impact of the current epidemic situation on investments from a global standpoint, which is vital and must be closely observed and monitored.
Legislative and Regulatory Reforms
Initially, it must be emphasized that the Egyptian government is highly responsive to the current epidemic COVID-19 (Coronavirus) situation in the world. In its attempt to limit the physical gathering of several individuals, the Egyptian authorities relaxed their requirement of physically attending board meetings and general assemblies and are currently exceptionally accepting electronic voting even it the statutes of the local company do not explicitly provide for such audiovisual meetings. The Central Bank of Egypt issued several recent circulars to regulate withdrawal, deposits and interest rates on loans in an attempt to respond to the current COVID-19 (Coronavirus) outbreak and its impact on the Egyptian Market.
Aside from the current global health situation which needs to be studied and assessed separately, one of the remarkable reforms to the Companies Law is the dematerialisation of shares in: (i) joint stock companies; and (ii) partnerships limited by shares before the Misr for Central Clearing, Depository and Registry (MCDR). The new amendment to the Companies Law obliges all joint stock companies and partnership limited by shares (whether existing or newly established) to register their shares with the MCDR. From a practical standpoint, if the company is registered with MCDR, shareholders could be hindered from executing a transfer of their shares if they did not comply with the depository of their shares, through a local custodian. It is worth mentioning that the companies' local regulator is now accepting undertakings from legal representatives of local subject companies to comply with the MCDR rule and hence, to certify corporate resolutions and to ensure of the continuation of local operations, in case the subject companies have failed to comply. The regulator has shown some tolerance of delays in complying with the present regulation. Companies are allowed to deposit their shares at the MCDR until 30 June 2020. We are not aware, to date, of any subsequent renewal of such tolerance period.
In all cases, the failure to comply with this requirement may hinder the target company perfecting the transfer of its shares before the Egyptian stock exchange (EGX). Which means it may cause a delay in the entry of an investor into the market, wishing to purchase the yet to be dematerialised shares. Indeed, if a company is registered with the MCDR, but the shareholders are yet to comply with the deposit of their shares with a local custodian as a requirement of completing the MCDR process, this could be an impediment to the execution of the transfer of shares, as the EGX will require this deposit as a condition precedent to the transfer.
Furthermore, a recent legislative tendency to protect minority shareholders’ rights is observable. For example, 2018’s amendments introduced for the first time the concept of “accumulative or proportional voting”; which allows shareholders to distribute their votes between candidates while voting for the election of company's board members. Every shareholder will be given a number of votes equivalent to the number of the shares it owns. Accumulative voting is optional; however, it must be set-forth under the company's statutes, should the shareholders desire to apply it.
Furthermore, with regard to listed companies, any person who has acquired or wishes to acquire, individually or through related parties, more than one third of the capital or voting rights in a company, shall notify the Financial Regulatory Authority (FRA) and submit a mandatory tender offer for the purchase of all remaining shares, voting rights, and/or bonds. An additional protective measure under the Capital Market Law was adopted, whereby in case any shareholder acquires 90% or more of the capital or voting rights of a company, any other shareholder holding at least 3% of the capital may request that the FRA, during the 12 months following the majority’s acquisition of the said percentage, notify the majority to submit a mandatory tender offer for the minority shares. These mechanisms provide minority shareholders an optional exit from the Egyptian market.
A national anti-corruption, anti-bureaucracy and digitalisation of governmental services campaign has been launched. The Egyptian Companies Law was amended in 2017 to introduce the electronic establishment of entities in Egypt. Prior to this amendment, the presence of a representative of future shareholders before the competent authority was a must.
The electronic establishment of entities in Egypt was not the first step taken to combat bureaucracy; as relatively recent expedited route was created at the competent authority, where the establishment of an Egyptian entity may take place within two business days from the date of submission of all needed incorporation documents. However, the latter process incurs additional governmental expenses (although these are relatively minimal), which the investor has to pay to expedite the establishment process.
Furthermore, since January 2020, it has been an obligation for taxpayers to submit their tax declaration along with the payment of the due taxes electronically; while this was not possible prior to the amendment made to the Income Tax Law in July 2019. Indeed, the Tax Authority implemented the required infrastructure and electronic systems to support the receipt of the taxpayers’ tax statements and payments electronically. Electronic tax payment and submission of tax reports is now enforced.
Introducing the digitalisation of government services and payments led the legislator to introduce the Data Protection Law. This law has not yet been promulgated; however, according to the media, a draft law is now being discussed in the House of Representatives and is anticipated to be very soon promulgated. The need for such a law was imminent, due to the encouragement of e-payment of government dues along with the growth of e-commerce which involves consumers providing sensitive banking data to merchants and, perhaps, other third parties, as the commercial transaction may require.
On a separate note, the government and the legislator understand that the Egyptian market needs to attract investors engaging in activities in different fields, since foreign investors were previously mainly attracted to the gas and oil sector. This led the government, jointly with the Egyptian House of Representatives, to implement more legislative reforms to the governing laws encouraging the entry of foreign investors in M&A transactions in a number of key industries in the market (eg, healthcare, education, telecommunications, natural resources and agriculture). To this end, the Investment Law, issued in 2017, promoted: (i) the investment in different key strategic fields; and (ii) directed those investments into underdeveloped areas in Egypt, by granting significant incentives, guarantees and tax discounts to such investments.
The accreditation of the shareholders agreement (SHA) by General Authority for Investment and Free Zones (GAFI) is now possible, while previously SHAs could not be enforceable vis-à-vis the shareholders who were not party to it. The amendment of the Companies Law (No 159 of 1981) now allows the SHA to be enforceable against other shareholders who are not parties thereto; and to be ratified before GAFI, subject to, inter alia, its approval by the Extraordinary General Assembly and meeting certain voting quorum requirements.
Since 2016, the Capital Market Law was amended to include a section regulating sukuk issuance and trading. Companies are now able to envisage their needs to finance their capital expenditure and anticipated projects via financing tools other than the conventional ones (eg, borrowing from banks, intercompany loans, or capital increase).
Furthermore, the legislator introduced the Movables Pledge Law enforced in 2016. This Law entailed the establishment of the movable pledge registrar, where banks are entitled to register the collaterals created upon granting facilities to companies. The reduction of the risk of debtors’ failure to repay their debts gives comfort to banks when financing companies, which in turn may lead to the expansion of their business and greater availability of finance for anticipated projects; subsequently boosting the Egyptian economy.
With respect to the safe exit from the Egyptian market, the new Bankruptcy Law was issued in 2018. This Law addresses the issue of the lengthy procedure required for bankruptcy. Henceforth, the bankruptcy procedures are expedited. Besides, if the investor does not yet wish to exit the market, the Bankruptcy Law provides for the possibility of the insolvent company restructuring or amicably settling its debts, which allows its survival, rather than its liquidation.
The relatively recent Law No 79/2016 allows taxpayers to suspend the jurisdiction of the competent court settling tax disputes, until the recommendation of the newly created tax committee is issued. Should the committee’s recommendation be acceptable to the taxpayer, it is considered as the resolution of the dispute and is entailed with an execution order thereon. Otherwise, the suspension of the court jurisdiction ceases, and the court becomes competent to settle the dispute once again. Introducing the above-mentioned dispute resolution mechanism speeds up the settlement of tax disputes, which usually take years before the courts.
Issues Facing Foreign Investors
Despite the above-mentioned remarkable efforts and legislative reforms, foreign investors still encounter certain obstacles, when entering into or exiting from the Egypt market. We demonstrate in this section the limitations that investors repetitively envisage.
Generally, all foreign investors will need to pass a security clearance process. Foreign investors are able to operate locally while undergoing the security screening procedure. However, and by way of exception, some foreign nationalities (routinely subject to change, upon the discretion of the competent authorities) require the security clearance to be issued prior to starting the business. Currently, the list of these nationalities includes China and Russia, in addition to some African countries. It is worth noting that, previously, the Chinese needed to obtain this prior approval before establishing any company in Egypt, but now this requirement has been slightly relaxed to be limited to acquiring existing businesses. This list of nationalities is not officially issued, however, it is merely verbally communicated.
In addition, depending on the field in which the investor wishes to engage, prior approvals and licences are usually required. The more strategic the field is, the heavier the required licensing and approvals burden.
For example, Ministerial Decree No 183/2019 stipulates that the amendment of the shareholders’ structure of an educational establishment requires the prior approval of the competent authority.
It is worth mentioning that the Egyptian government is attempting to regulate new and different major economic sectors. As an example, in August 2019 a new decree was issued constraining foreign ownership in the share capital of private schools, and any schools applying an international curriculum, to 20% equity. This is an unprecedented move from the government towards the education industry, such a constraint was never adopted by previous governments, and might affect foreign investors' appetite to direct more investment into the education sector. The market reaction in this respect is still being monitored, especially to assess whether a multi-tier structure might still trigger any regulatory concern to comply with such constraint, which we believe is the case.
It is worth mentioning that a subsequent amendment to the Decree was issued in November 2019, providing for a possible exemption from the foreign ownership cap, upon prior approval of the competent authority. In all cases, any amendment to the shareholding structure is subject to the prior approval of said authority.
In light of the above, the government seems to be resistant to allowing the entry or the exit of foreign investors in certain strategic fields.
As another example, the FRA, which is the authority regulating the Egyptian capital market, the stock exchange and non-banking financial institutions, heavily regulates the ownership of shares in such financial institutions, together with regularly issuing resolutions on the corporate governance thereof. The regular and numerous resolutions issued by the FRA to this effect renders investment in non-banking financial institutions unattractive to foreign investors.
Another legislative reform has been introduced to streamline the licensing of industrial activities. The Industrial Entities’ Licensing Law (No 15 of 2017) was enacted to regulate the licensing of industrial entities according to the risk level associated with the performance of the relevant industrial activity. This law minimised the time taken to issue an industrial licence to one month, instead of two years as was previously the case. This law also relaxed the procedures in a way that provides a more investor-friendly environment. In fact, for low-risk industries, as defined by the Industrial Development Authority, the investor may now notify the competent authority of its satisfying the requirements for that industrial objective in order to commence its activity, and the regulator will then issue the licence within one week. Previously, investors had to go through a very lengthy process to obtain the required licence in order to commence its operation.
In addition to the above, a recent disclosure requirement has been issued, as a new regulatory amendment has been recently introduced to the Investment Law and its executive regulations for the purpose of monitoring foreign investments in Egypt. Very recently, Law No 141/2019 and decrees No 2731/2019 and 2732/2019 were issued, amending the Investment Law and its executive regulations (New Disclosure Requirement). Under this New Disclosure Requirement, any corporate entity established in Egypt, or investment project carried out in Egypt, involving a minimum of 10% foreign shareholding for non-listed companies or 2.5% for listed companies (excluding any company operating locally by virtue of a concession agreement) is now required to submit disclosure/reporting forms to GAFI on a quarterly and annual basis or in the event that certain articles of a company’s statutes are amended. Three different types of disclosure forms have now been introduced under the New Disclosure Requirement. The New Disclosure Requirement came into force on 7 November 2019 and should have been applicable from December 2019. However, we note that practically, the local companies regulator is currently showing some flexibility as to the implementation of the new requirement.
Although observing that the above requirement was not strictly monitored, a Ministerial Decree was issued in 1 March 2020, to oblige all companies to maintain at all times an updated ledger in its premises, namely, the Ultimate Beneficiary Owner Ledger. In such ledger, each company must state, inter alia, names, nationalities and identification information of the shareholders, up to the ultimate beneficial owners. Delivering such ledger to the Commercial Register Authority is crucial for approving registration requests or reflecting any new data in their commercial register. Accordingly, the Commercial Registry Authority may be resistant to any annotation of any amendments to the commercial register of a company, in case of failure to deliver the required ledger. Also, given the very recent nature of the above decree, the implementation of this obligation is yet to be tested in practice.
With respect to the repatriation of dividends, although the Investment Law reiterated the desirability of smooth repatriation of funds outside of Egypt,in practice, and according to the Central Bank of Egypt's internal regulations, Egyptian banks have the discretion to approve the consummation of repatriation of hard currency transactions depending on the supporting documentation. Accordingly, banks require documents supporting the need to wire transfer hard currency outside Egypt. This shall be without prejudice to any possible discretionary circulars that the Central Bank of Egypt may issue restricting the repatriation of hard currency outside Egypt. The banking regulations in this respect should be closely monitored to assess the impact of the current epidemic situation.
With respect to merger control, the Competition Law 3/2005 and its executive regulations, as amended, which regulate competition and monopolistic practices, require a post-notification to be served to the Egyptian Competition Authority (ECA) within 30 days of completion of the transaction. In an unprecedented move, the ECA recently issued a decision on the prospective and alleged merger talks between two major market players in the transportation sector, effectively pre-empting their merger by declaring that a prospective merger (even if the agreement took place overseas) would constitute a breach of the Competition Law and jeopardise competition as it would affect the price of services provided by both competitors and restrict the provision of those services, which can only negatively affect consumers. This is a novel and rather liberal interpretation of the law, which reflects a change in the ECA’s attitude towards market players by resorting to provisions other than those dealing with merger notification to control mergers prior to their occurrence. To date, the question remains open as to whether the same approach would also apply in other sectors.
M&A transactions still face some challenges with regard to the obligation of payment of the full consideration in cash to perfect the transfer of shares before the EGX. This obligation lacks flexibility; as it puts limitations on the contractual mechanisms for the payment of consideration that is sought by the parties of a share purchase agreement.
The constant legislative reforms of the Egyptian Cabinet have led a number of international private equity companies to direct more investment to Egypt, and consequentially M&A transactions have increased. The past two years have seen progression in M&A transactions in Egypt. Private equity firms remain one of the key players in the market in terms of both the number or deals and total value, and private M&A transactions remain dominant in the market. The M&A market has seen notable progress for certain sectors, inter alia, healthcare, education, telecommunications and natural resources.
To conclude, the very recent Cabinet Decree No 38/2020 was issued to establish a ministerial investment committee of which the members include, the governor of the Central Bank of Egypt, the Minister of International Co-operation and the Minister of Finance. Along with promoting investment in Egypt, the objective of this committee includes solving the issues that investors envisage while doing business in Egypt. The effectiveness of the committee is yet to be monitored. However, it is certainly an additional decent step towards rendering the Egyptian market attractive to foreign investors.