Corporate M&A 2021

Last Updated April 20, 2021

Egypt

Trends and Developments


Authors



Shahid Law Firm was established in 1987 by Counsellor Sarwat Abd El-Shahid, after serving as judge and state counsellor for nearly two decades. Shahid Law currently has more than 70 lawyers and support staff, all of whom possess outstanding knowledge of the local legal and business environment. Shahid Law Firm, with its offices located in Egypt and a wide network with many international law firms worldwide, represents major businesses, governments and other organisations – both public and private – in sophisticated corporate matters, mergers, acquisitions, real estate matters, finance transactions, project finance matters, and government and internal investigations. The firm’s strength lies in its understanding of clients’ commercial needs, which, coupled with a detailed knowledge of the Egyptian legal system and long-standing experience in transactional operations, ensures that clients can obtain the best commercially oriented service required. This is recognised by the consistent ranking of the firm and its attorneys among the leading practitioners in their fields.

In light of the impact of the COVID-19 pandemic on the global economy, the Egyptian state adopted preventative measures in parallel with the continuous legal reforms that were adopted a few years ago. The Egyptian House of Representatives (EHoR) has enacted legislative reforms covering several vital economic sectors across Egypt to contain the impact of COVID-19, especially on Egypt’s production and service sectors. Governmental bodies have issued a set of executive decrees to effectuate the preventative measures.

Despite the pandemic, Egypt has continued climbing the World’s Bank’s Doing Business index, jumping six places due to the robust developments in the legislative environment – the second-largest number of reforms undertaken among MENA (Middle East and North Africa) countries, the World Bank's Doing Business report for 2020 stated.

New Consumer Financing Law Increases Compliance Requirements in M&A

The EHoR has enacted its first law on consumer financing, Law No 18 of 2020. The key feature is to regulate non-banking consumer finance company (CFC) activities in Egypt. The CFC must be licensed by, and registered with, the Financial Regulatory Authority (FRA) as a joint-stock company with an issued capital of at least EGP10 million. Further, the law allows companies to lend for, among others, vehicles, durable goods, educational services, medical services, travel and tourism services.

Further, the FRA issued Decree No 100 of 2020, dated June 6th (the “Decree”), repealing Decree No 61 of 2020, outlining the corporate governance rules and regulations of, inter alia, a CFC. The Decree provides that the structure of the board of directors (BoD) of a company operating in consumer financing must be as follows:

  • the majority of the board members shall be non-executive members, of which at least half must be independent members, including at least one female board member;
  • the CFC must implement a cumulative voting system in the election of the board members; and
  • the chairman, managing director and CEO titles at the CFC cannot be occupied by the same individual.

Generally, a CFC’s BoD should form several committees emerging from its BoD in order to perform the latter’s role in an efficient manner. Therefore, the Decree stipulates that the following committees must be formed:

  • an auditing committee composed of an odd number of not less than three non-executive board members;
  • a risk committee composed of an odd number of not less than three members, the majority of whom shall be a mix of non-executive and independent board members; and
  • a governance committee composed of an odd number of not less than three members, the majority of whom shall be a mix of non-executive and independent board members.

According to the Decree, the board members of the CFC are obliged to avoid conflicts of interest. To this effect, the CFC’s board members or any of their relatives up to the second degree are not allowed to receive any sort of financing from the CFC. Further, a CFC board member shall not have a direct or indirect interest in any business transaction or agreements concluded for the benefit of the CFC unless the prior approval of the general assembly is obtained. Furthermore, this approval must be renewed on a yearly basis. Accordingly, the board member shall provide a comprehensive disclosure of the – direct or indirect – conflict of interest.

The CFC shall disclose to the FRA any material events, once they have occurred, to which the CFC is exposed that affect the CFC’s operation.

The CFC shall have an efficient and comprehensive internal audit system that mitigates risk, safeguards the CFC’s traders, impedes any leakage of insider information, and oversees the compliance of the CFC and its employees with Egyptian laws and regulations. The internal audit system shall also monitor placing the accountability rules within the CFC.

The CFC’s chairman, board members and employees are not allowed to:

  • trade the shares/securities of the CFC, or holding, sister or affiliate companies based on unpublished insider information; or
  • leak any privileged information or any other information related to the CFC’s customers other than that information that must be communicated to the supervisory bodies of the state.

From an M&A perspective, the impact of this newly issued regulation would trigger further compliance scrutiny from the buy side, while carrying out a legal due diligence, which typically should be addressed under the transaction documents, to avoid any undesirable implications/liabilities at the closing, when acquiring a CFC.

In contrast, the sell side should consider re-organisation of the target CFC, in case of any ongoing or future sale of business, to comply with said new regulations, which will end up mitigating the seller’s liability and limiting exposure for any extensive reps and warranties, indemnities, or conditions to closing. Furthermore, as imposed by the FRA, the CFC shall have at least 25% of its shares owned by a financial institution. Thus, in the case of selling a CFC, said percentage of ownership shall be maintained at all times.

Furthermore, the board of the Egyptian Sovereign Fund has issued Decree No 7 of 2020 promulgating the establishment of a sub-fund, namely Egypt’s Sub-Fund for Financial Services and Digital Transformation (the “Egypt Fund”), which has the objective of investing in non-banking financial services, digital transformation, financial inclusion, insurance and insurance brokerage services, real estate financing, financial leasing, factoring and microfinancing, etc. In the authors' view, the establishment of the Egypt Fund represents an important step of the Egyptian state towards encouraging investors to carry out more investments/business in the non-banking financial services sector, which reinforces the chances of witnessing more business combinations in said sector and potential co-operation between private sector corporate entities and the Egypt Fund in such sector.

The Unified Tax Procedures Law Aims to Help Move Towards the New Tax E-system

The EHoR recently enacted Unified Tax Procedures Law No 206 of 2020 (UTPL), followed by amendments under Law No 211 of 2020 (the “UTPL Amendments”). The UTPL introduces unified tax procedures for the assessment and collection of tax amounts that will be applied to income tax, value-added tax (VAT), state development tax, stamp duty and any other similar taxes.

Mainly, the UTPL aims to unify procedures for different tax categories of a similar nature, and to establish the legal basis to transform tax procedures into the new tax e-system that aligns with the state’s vision of the digital economy.

The UTPL secures certain facilities, such as:

  • confidentiality rights of taxpayers who become, now, able to submit documents/analysis in a foreign language, provided that such documents/analysis are translated and certified by an authorised translator; and
  • an electronic signature will have the same authenticity as a written signature.

According to the UTPL, all tax returns must be submitted through the accredited electronic system with an e-signature. Taxpayers will be required to pay a usage fee of up to EGP1,000. The details on this have not been provided under the UTPL as of yet.

Furthermore, the tax return filing deadlines have been amended, as follows.

  • Monthly VAT return – the deadline for submitting the monthly VAT return, including for periods of non-taxable activity, will be the month following the end of the tax period. Previously, the deadline was two months following the end of the tax period. The VAT return frequency may be changed for importers and exporters, or those providing a service only once or twice a year, if approved by the head of the Egyptian Tax Authority (ETA) or his delegates.
  • Quarterly salary tax returns – businesses must submit quarterly returns for salary taxes in January, April, July and October of each year.
  • Annual corporate tax return – the UTPL retains the same deadline for filing the annual corporate tax returns, which is four months from the financial year end for companies and before April 1st for natural persons.

Under the UTPL, a taxpayer has the right to submit an amended return during the year following the due date set for submitting the annual return, unless the taxpayer has evaded tax or received an inspection notification.

If the amended return submitted reflects lower tax due than the original return, the ETA should review the amended return and approve the refund within six months from the date of application.

Transfer Pricing Requirements in Egypt

Each juristic person who has commercial or financial transactions with related parties is obliged to provide the ETA with documents related to the pricing of transactions, namely:

  • a master file, which includes information on all members of the global group;
  • a local file, which includes the transactions of the local taxpayer; and
  • a country-by-country report (CbCR), which includes financial information on associated persons in the global group.

A taxpayer must prepare and submit the master file and the local file if its aggregate related-party transactions exceed EGP8 million for the year. Moreover, the UTPL also stipulates a transfer pricing-specific penalty for non-compliance, thereby completing the transfer pricing legislative framework. The penalty imposed by the UTPL is 1% of the total value of the related-party transactions that are not declared in the taxpayer’s corporate income tax return.

The law shortens the period for the ETA to release an opinion when a ruling application is submitted. The revised period is 30 days from the date when all required documents are submitted, instead of the earlier 60-day period.

With respect to the documents’ retention, taxpayers are required to maintain books and records, including invoices, for five years following the submission of the tax return.

Compliance with the UTPL and Its Amendments Is Key in M&A Transactions

The scope of application of the UTPL Amendments mainly tackled transfer pricing, where specific penalties and sanctions were imposed because of tax evasions and non-submission of tax returns.

The UTPL Amendments have introduced specific penalties with respect to transfer pricing, as follows:

  • 1% from the undisclosed related-party transactions amount in the event of failure to disclose the related-party transactions in the annual income tax return;
  • 3% from the related-party transactions amount in the event of failure to submit the master file or the local file; and
  • 2% from the related-party transactions amount in the event of failure to submit the CbCR.

In all cases, the total penalty shall not exceed 3% of the total value of the related-party transactions amount.

In addition, the UTPL Amendments have limited the ETA’s power to assess or amend the tax return to within five years from the lapse of the period required by law to submit the tax return.

Further, in the event of not submitting the tax returns after the lapse of 60 days, according to the timeline designated under the UTPL, the UTPL Amendments impose a penalty of a fine of not less than EGP50,000 and not exceeding EGP2 million. In the event of a reoccurrence of the failure to submit the tax returns for more than six monthly returns or three annual returns, a fine of not less than EGP50,000 and not exceeding EGP2 million, and/or imprisonment for a period of not less than six month and not exceeding three years shall apply.

The UTPL Amendments state that the liability for tax evasion committed by corporations shall be attributed to the manager, chairman or managing director who is in charge of the actual management and operations unless he or she proves unawareness of the evasion fact.

In an M&A transaction, compliance with the UTPL and its amendments would become one of the key items that should be monitored in a tax due diligence carried out by the tax advisers of the buy side. The sell side should ensure its constant compliance with the new obligations and requirements of the UTPL and its amendments to eliminate any tax liabilities that might affect the business and, by extension, the possibility of exposure to extensive reps and warranties, and retention of purchase prices, as well as escrow arrangements under the transaction documents.

New Waste Management Law Reflects the Sector's Appeal to Investors

Another area of investment that may be attractive to investors is waste management. To this end, Egypt has enacted Waste Management Law No 202 of 2020 (WML).

The WML mainly regulates waste generation and processing, with the purpose of promoting the waste management industry. Aside from the supervisory role vested, under the WML, in the Waste Management Monitoring Authority (WMMA), the WMMA aims at assessing and developing all waste integrated management activities to attract and promote investment in this area.

Despite the recency of the WML, all companies operating in the waste management industry before the enactment of the WML will have to comply with new requirements stipulated under the WML to ensure continuity of their operations, as well as possibilities of business combination in the form of a merger or an acquisition. Further, and aside from the sanctions imposed by the WML, the sell side of the waste management business may be exposed to environmental reps and warranties, and indemnities under the transaction documents if the target waste management company proves non-compliance with the WML, which may also result in the transaction being cancelled if the liabilities discovered under the due diligence report are irremediable.

Egyptian M&A Transactions Benefit from a COVID-19-Related Tax Waiver

In light of the Egyptian state’s endeavours to mitigate the impact of COVID-19, the EHoR issued Law No 173 of 2020, waiving the delayed payment fines, additional tax, interests and similar non-criminal financial penalties imposed under various duty/tax/customs-related laws before the issuance of said law.

As a general condition in order for the taxpayers to benefit from the aforesaid waiver, taxpayers shall pay the original tax or duty in full, starting from the effective date of said law. The tax waiver will be applied to the due and payable tax, and/or duty imposed, as follows:

  • 100% waiver if the payment is made before the effective date of the law (ie, 17 August 2020);
  • 90% waiver if the payment is made within the first 60 days as of the effective date of the law (ie, 17 August 2020 until 15 October 2020);
  • 70% waiver if the payment is made within 60 days following the period stated in the second bullet point (ie, 16 October 2020 until 14 December 2020); and
  • 50% waiver if the payment is made within 60 days following the period stated in the third bullet point (ie, 15 December 2020 until 12 February 2021).

In all cases, the application of the law shall not permit taxpayers to be reimbursed for the payment of interest on late payment and additional tax made prior to the effective date of such.

In the M&A scene, the authors have witnessed several transactions in which the seller was able to mitigate the discovered tax liabilities by benefiting from the exemptions, within the above designated terms, which led the sellers to clear their tax position before closing and limit the seller’s tax liabilities under the transaction documents.

Cabinet Decree No 6 of 2020 (the "Decree") was issued to further encourage investments that fall under Investment Law No 72 of 2017 (the "Investment Law").

The Decree clarifies the regulatory framework under which expansions to existing investment projects under the Investment Law are entitled to receive the special incentives stipulated under the Investment Law. Such incentives cover 30% to 80% of the investment costs through tax breaks, depending on the nature and location of the investment project. Additionally, the Investment Law stipulates that more incentives can be issued by virtue of a Cabinet decree ranging from the state covering a portion of the utility delivery costs (water, electricity, etc) to allocating land for the project without consideration.

The Decree states the eligibility requirements to receive the incentives. The expansion must fulfil the following conditions:

  • it must fall under the activities stipulated by the Investment Law’s executive regulations;
  • it must occur after the issuance of the Investment Law;
  • it must include adding new assets that increase the production capacity of the project, bearing in mind that such an assessment will be carried out by a committee from the General Authority for Investments (GAFI);
  • it must have independent financial statements; and
  • the incentives can only be triggered after the expansion increases the production capacity.

GAFI will also issue technical guidelines and standards to ascertain that the aforementioned conditions are met.

The Decree stipulates that GAFI is the sole authority empowered to issue the certificates for project expansions to benefit from the incentives. The applicant must submit a written application with the necessary documents as determined by GAFI.

The Decree sheds some clarity on the Investment Law and allows GAFI to act assertively to encourage investments in Egypt.

Raft of Measures to Mitigate the Economic Impact of COVID-19

In response to the COVID-19 outbreak, the Egyptian government has taken numerous measures and issued a number of decrees to support the Egyptian economy. In line with such measures, Law No 24 of 2020 setting out certain financial rules for the ramifications of the coronavirus (FRL) was issued.

The FRL sets out some financial facilitation measures for companies, entities and individuals working in the sectors affected by COVID-19, whereby the Cabinet, upon the proposal of the minister of finance in accordance with the information submitted by the competent ministries, is entitled to take the following measures.

  • Real estate tax – postpone the payment of the real estate tax that is imposed on buildings that are used in the economic sectors or production and service-related activities affected by COVID-19, partially or wholly, for a renewable period of three months.
  • Income tax and value-added tax – grant the taxpayers registered within economic sectors or production and service-related activities affected by COVID-19 a grace period to submit their tax returns or postpone the payment of due taxes, partially or wholly, for a renewable period of three months. There will not be any fee for delayed payment or additional tax applied during the grace period. The latter will also not be included in the duration of the limitation period for the due tax.
  • Administrative services fee – the recipient of administrative services is allowed to pay the fees in instalments without interest, for a renewable period of three months.
  • Social insurance contributions – employers are entitled to a grace period to pay the social insurance contributions and settle due payments or to make such payments in instalments, wholly or partially, for a renewable period of three months, without additional payments.

The FRL authorises the prime minister to issue the necessary decrees to implement the financial facilitation measures.

The sectors affected by COVID-19 will be determined by virtue of a Cabinet decree. It is worth noting that the ETA has previously issued Circular No 47 of 2020 on 27 April 2020, providing for tax facilitation measures, including settling income tax in instalments available to the affected sectors, such as aviation, tourism and antiquities, hospitality, media, manufacturing, and telecommunications, as well as sports and sports services.

With respect to the conditions of application of the FRL, the entities must satisfy the following two conditions in order to benefit from the facilitation measures:

  • entities shall not lay off employees and shall not have previously laid them off; and
  • entities shall not reduce the basic salaries of employees.

It is worth highlighting that any entity that has undertaken any of the aforementioned actions may be entitled to benefit from the facilitation measures under the FRL, provided that any laid-off employee is to be re-employed. Eventually, the FRL retroactively entered into force as of 31 March 2020.

New Law to Help Medium, Small and Micro Enterprises Weather the Pandemic

In light of the state’s role to support medium, small and micro enterprises (MSMEs), the EHoR issued Law No 152 of 2020, aiming at regulating and developing the business atmosphere of the MSMEs (the “MSMEs Law”).

The MSMEs Law regulates and incentivises MSMEs through a variety of tax and non-tax incentives. The MSMEs Law also attempts to bring in a shadow economy under its auspices by offering a range of benefits that include facilitating the licensing process and tax breaks.

The MSMEs Law categorises and identifies the MSMEs that can be eligible for the incentives, as follows:

  • the medium enterprise – any enterprise with annual revenues between EGP50 million and EGP200 million, any newly established industrial enterprise with a paid-in or invested capital that ranges from EGP5 million to EGP15 million or any newly established non-industrial enterprises with a paid-in or invested capital that ranges from EGP3 million to EGP5 million;
  • the small enterprise – any enterprise with annual revenues between EGP1 million and EGP50 million, any newly established industrial enterprise with a paid-in or invested capital that ranges from EGP50,000 to EGP5 million or any newly established non-industrial enterprises with a paid-in or invested capital that ranges from EGP50,000 to EGP3 million; and
  • the micro enterprise – any enterprise with annual revenues less than EGP1 million, or any newly established enterprise with a paid-in capital or invested capital of less than EGP50,000.

The MSMEs Law facilitates the allocation and financing of lands to MSMEs, as it provides creditors with a new mechanism for enforcing their rights over the allocated land, including temporary allocation of the land in the name of the creditor, facilitating transfer of allocation rights, and simple and expedited enforcement procedures. Further incentives are also provided for certain sectors, including technology, entrepreneurship, manufacturing and agriculture.

The MSMEs Law extends some of the incentives to incubators and accelerators of MSMEs, such as companies, entities, associations or any other legal entities that support MSMEs by providing financial, marketing or management services. Some incentives can also be provided to investment companies that provide equity financing to MSMEs.

The MSMEs Law also provides for tax and non-tax incentives for MSMEs, including an exemption on governmental fees such as incorporation fees, as well as reduced tax rates.

A further temporary licensing regime was introduced with the purpose of incorporating the shadow economy into the regulated/formal economy. This is combined with establishing specific units within governmental authorities to deal exclusively with MSMEs to facilitate and expedite all their procedures.

New Decree on the Operation and Disposal of Medical Facilities Set to Trigger M&A in the Healthcare Sector

Another development was recently witnessed with respect to the operation and legal disposal of medical industrial facilities; as the New Decree No 99 of 2021 was issued on 2 March 2021 by the Egyptian Drug Authority (EDA), whereby no medical industrial facility can be established nor expanded unless the EDA approves so.

Furthermore, the Decree prohibits any sort of legal disposal (eg, sale and purchase) of medical industrial facilities unless prior notification is served to the EDA via certain forms prepared by the EDA. To this effect, the prior notification shall be associated with the necessary undertakings that will be determined by the EDA to ensure sustainability of the availability of medicine in the market.

In the authors' view, the Decree might trigger ongoing and future M&A transactions in the healthcare sector, and hence the implementation of said Decree is to be closely monitored to verify how companies will comply with these new notification requirements. 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.

New Governance Rule Imposed by the FRA Decree

On 8 March 2021, another rule was imposed by virtue of FRA Decree No 28 of 2021, whereby any listed company’s board of directors receiving a tender offer shall refrain from calling for general assembly meetings as of the date of publishing the FRA’s approval on both the tender offer and offering memorandum at the Stock Exchange until the date of announcing the result of the tender offer. In the authors' view, the decree might trigger a few implications, mainly the disability of the listed company addressed by the tender offer to convene general assembly meetings to discuss and approve its annual financials, which is yet to be observed. 

Legal Disposals in the Media Sector

For companies that broadcast content (eg, services or products) through the internet using a website, prior licensing is required from the local regulator as stipulated by Media Law No 180 of 2018 and its executive regulations (the "Media Law").

In the context of M&A, the Media Law prohibits any media company's legal disposal unless the local regulator's prior written approval is attained. To this effect, the word "media" under the relevant articles of the Media Law is a bit ambiguous. Hence, the interpretation of relevant articles under the Media Law that impose the prior written approval of the local regulator to validate any legal disposal at "media" might extend to websites where companies operating in the e-commerce industry promote products (being a type of media). However, the application of the local regulator's prior written approval on the companies operating in the e-commerce industry is to be observed.

New Approaches to Foreign Ownership and Competition by the Government and the Egyptian Competition Authority

The Egyptian government is attempting to regulate different major economy sectors. As an example, in August 2019, a new decree was issued that constrains 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 that might affect foreign investors' appetite to direct more investments in the education industry. 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.

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 main 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 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. The question remains as to whether the same approach would also apply in other sectors.

On 15 September 2020, the EHoR enacted the new Central Bank and Banking Sector Law No 194 of 2020 (the “New CBE Law”), repealing the previous Central Bank Law No 88 of 2003 (the “Former CBE Law”). One of the key changes imposed by the New CBE Law is that any local bank is required to maintain a minimum EGP5 billion in capital instead of EGP500 million under the Former CBE Law. In the authors' view, this significant change could trigger business combinations amongst the banks operating in Egypt, which also become easier under the New CBE Law, yet subject to certain requirements to safeguard the interests of employees and customers in the event of a merger.

In conclusion, in light of the above new legislation and regulations, the authors highly encourage investors to monitor such developments and their impact on ongoing or future M&A transactions.

Shahid Law Firm

20B Adly Street, Downtown
11511 Cairo
Egypt

+202 2393 5557

+202 2393 5447

info@shahidlaw.com www.shahidlaw.com
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Trends and Development

Authors



Shahid Law Firm was established in 1987 by Counsellor Sarwat Abd El-Shahid, after serving as judge and state counsellor for nearly two decades. Shahid Law currently has more than 70 lawyers and support staff, all of whom possess outstanding knowledge of the local legal and business environment. Shahid Law Firm, with its offices located in Egypt and a wide network with many international law firms worldwide, represents major businesses, governments and other organisations – both public and private – in sophisticated corporate matters, mergers, acquisitions, real estate matters, finance transactions, project finance matters, and government and internal investigations. The firm’s strength lies in its understanding of clients’ commercial needs, which, coupled with a detailed knowledge of the Egyptian legal system and long-standing experience in transactional operations, ensures that clients can obtain the best commercially oriented service required. This is recognised by the consistent ranking of the firm and its attorneys among the leading practitioners in their fields.

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