Shareholders' Rights & Shareholder Activism 2019

Last Updated July 23, 2019

Egypt

Law and Practice

Authors



Matouk Bassiouny & Hennawy is a full-service independent regional MENA law firm based in Cairo, Egypt (Matouk Bassiouny & Hennawy), with offices in UAE and Sudan, and country desks in Algeria and Libya. The firm specialises in advising multinationals, corporations, financial institutions and governmental entities on all legal aspects of investing and business in the region. The team of 19 partners and more than 145 lawyers are trained both locally and internationally and are fluent in English, Arabic and French. The Corporate Group’s primary goal is to provide top-level general corporate and mergers and acquisitions advice to clients, including to a wide range of multinational corporations, private equity firms, fund managers and blue-chip investors in Egypt and in the region. Headed by Omar S. Bassiouny, founding partner and Tamer El Hennawy, executive partner and group co-head, the Corporate Group consists of nine partners and over 60 lawyers.

Under Egyptian law, there are different types of companies, as follows:

Joint-stock companies

In joint-stock companies, the issued capital of the company is divided into shares of equal value to be owned by the shareholders of the company. The issued capital is the amount paid in cash or in kind, whether in full or in instalments, by the shareholders. The joint-stock companies must have at least three shareholders at the time of incorporation and throughout their duration. The minimum required capital for this type of companies is EGP250,000. However, if the company will be publicly traded, the minimum required capital shall not be less than EGP500,000. Notwithstanding the above, the law may require a different minimum capital, depending on the type of company’s activity, for example, the minimum capital of the company dealing with securities must not be less than EGP5 million.

Limited liability companies

In limited liability companies, the issued capital of the company is divided into quotas. The limited liability company must have at least two quota-holders and no more than 50 quota-holders. No minimum capital is required for establishing a limited liability company. However, in practice, it must not be less than the minimum required amount for a bank to open a bank account and issue a bank certificate evidencing the payment of the company’s capital.

Partnership companies

A partnership company is a company that requires at least two partners who are jointly liable with the company. The minimum required capital is EGP300,000. This form of company is not common, as it requires a minimum Egyptian participation of 51% of the capital of the company, in addition to the non-existence of corporate veil.

Partnership limited by shares

This type of company is a hybrid between the partnership companies and joint stock companies. The issued capital of such companies consists of a number of quotas to be held by at least one partner who is jointly liable with the company and a non-liable partner. The minimum required capital for this type of companies is EGP250,000.

Sole proprietorship

Previously, Egyptian law did not recognise a company with a sole shareholder. However, Egyptian law has recently been amended to adopt this new type of company, which is the sole proprietorship. Such a company can be incorporated by a single shareholder. The shareholder and the company are not jointly liable, except in certain situations. The minimum required capital for the sole proprietorship is EGP50,000.

The minimum required capital for each of the aforementioned companies may vary in light of the activities undertaken by the company.

Egyptian law may require that a minimum percentage of the company’s share capital be owned by Egyptian nationals, based on the nature of the activity to be undertaken. This requirement will depend on the nature of the activity or the type of the company’s activity.

In addition, certain geographical areas, such as the Sinai Peninsula, require that the company operating in such areas be either fully or majority-owned by Egyptian nationals.

Furthermore, it is worth mentioning that if the number of shareholders or quota-holders has become fewer than the minimum required number under the Egyptian law, the company has to align its legal standing to meet the minimum required number within six months or the remaining shareholder request from the competent authority to convert the form of the company to a sole proprietorship. Otherwise, the company will be considered as dissolved by law and the corporate veil may be prejudiced.

The main types or classes of shares are as follows:

Common Shares and Preferred Shares

In order for a company to have preference shares, the articles of association of the company should adopt the issuance of preferred shares. The main difference between the preference shares and the common shares is related to the rights granted to each type of shares; mainly, it will be related to voting, dividends and the proceeds of the liquidation;

Cash Shares and In-kind Shares,

The main difference between the cash shares and in-kind shares is the consideration under which the shareholder is participating in the company’s capital. In the case of the cash share, the shareholder subscribes to that share in cash payable to the issuing company. However, in the case of the in-kind share, the shareholders subscribes to the issued shares via the transfer of the title of a specific asset to the issuing company. It is worth noting that there is a long statutory process for participating in the company’s capital by in-kind shares. The most significant difference between both types is the disposal restriction. Egyptian law imposes a restriction on the sale of in-kind shares for a certain period.

There are a number of laws and regulations that regulate and govern shareholders’ rights under Egyptian law. The main relevant laws and regulations are the Companies Law No 159 of 1981 and its Executive Regulations, and the Capital Market Law No 95 of 1992 and its Executive Regulations. Additionally, the Egyptian Stock Exchange Listing Rules and executive decrees issued by the Financial Regulatory Authority and the decrees issued by the General Authority of Investment cement and compliment the regulatory framework governing shareholders' rights.

Further, and notwithstanding that Egypt is a civil-law jurisdiction, the Egyptian Court of Cassation rulings (the highest court in the land) lays down important principles in connection with shareholders’ rights.

As a general principle, Egyptian law provides that all shareholders holding the same class of shares are equal insofar as their rights and obligations are concerned and it is impermissible to increase the liabilities of the shareholders. Each and every resolution adopted and issued from the General Assembly that is deemed to prejudice the basic rights of a shareholder shall be deemed null and void.

The main common rights to all shareholders are the rights to:

  • vote;
  • obtain dividends;
  • pre-emption right to subscribe to newly issued shares unless waived by the general assembly; and
  • obtain liquidation proceeds.

Notwithstanding the foregoing, shareholders’ rights vary according to the company’s constitutional documents or an agreement between the shareholders or via the holding of different classes of shares.

The articles of association and its amendments must be published in the investment gazette and hence forms part of the public domain. 

Shareholders’ agreements and joint-venture agreements are enforceable under Egyptian law, provided that their respective terms and provisions do not conflict with public order or mandatory provisions of Egyptian law that contracting parties cannot contract out of.

The shareholders’ agreement is valid between its parties from the date of its execution or its effective date. Whilst shareholders' agreements are valid and enforceable between the contracting parties, shareholders’ agreements must be approved by the extraordinary general assembly of the company in order to be enforceable vis-a-vis the other shareholders and the company, and require an affirmative vote supported by a minimum of three quarters of the company’s share capital to approve the shareholders’ agreement.

Shareholders’ agreements are common under Egyptian law, whether for green fields’ projects or following a merger or acquisition of shares by a new investor.

As previously mentioned in 1.4 Main Shareholders' Rights, Egyptian law, in principle, stipulates that the shareholders are equal in their rights and obligations.

In essence, the board of directors enjoys the widest powers to manage resolutions, other than those that are exclusively within the competence of the ordinary and extraordinary general assemblies and which, depending on the nature of the resolution in question, may require  a simple majority of three quarters, or no less than two thirds, affirmative approval of the attending shareholders in a quorate ordinary or extraordinary general assembly, as the case may be.

Further, there are specific actions require to be undertaken by shareholders holding a certain percentage of shares in the company’s share capital, whereby: 

  • holders of 5% of the company’s share capital have the right to call for an ordinary general assembly meeting;
  • holders of 10% of the company’s share capital have the right to call for an extraordinary general assembly meeting;
  • holders of 5% of the company’s capital are entitled to add issues to the agenda of the ordinary general assembly;
  • holders of 10% of the company’s shares are entitled to obtain information and copies of the documents related to the related party agreements; and
  • holders of 5% of the company’s shares are entitled to request that the competent authority postpone a resolution resolved by the ordinary general assembly. 

The Companies law grants the shareholders the right to access the company's documents and information, whereby:

  • the board of directors, annually, shall prepare and disclose to the shareholders a detailed management report in connection with the company’s activities;
  • the shareholders have the right to access the company’s ledgers and obtain copies of those ledgers; and
  • the shareholders who individually or collectively own at least 10% of the company’s shares are entitled to obtain information and copies of the documents relating to the related party agreements.

Under the Capital Market law, every person concerned shall have the right to access to the documents, registers, reports, and minutes relating to the company.

There are certain issues that require the approval of the shareholders. These approvals take the form of a resolution to be issued by an ordinary general assembly (OGM) or extraordinary general assembly (EGM).

The Ordinary General Meeting (OGM)

According to Article 63 of  Law No 159 of 1981 (for the purpose of this section “Law”) and Article 216 of its Executive Regulations, the OGM is concerned with the following matters:

  • election and dismissal of the company’s board of directors (BOD) members;
  • supervision of the company’s BOD and deciding whether to discharge that board from responsibility;
  • ratifying the company’s balance sheet and the profit and loss account;
  • ratifying the BOD’S report in relation to the activity of the company;
  • ratifying the auditor’s report;
  • approving the distribution of the company’s dividends;
  • determining the honoraria and allowances of the BOD members; and
  • appointing the external auditor and determining his or her fees.

According to Article 217 of the Executive Regulations of this Law, the OGM is also concerned with the following matters:

Financial Issues

  • to suspend allocation of dividends to the legal reserve if it reaches 50% of the issued capital;
  • to form reserves other than the mandatory legal and statutory reserves;
  • to dispose the reserve and appropriations in fields other than the ones for which they were initially appropriated;
  • to approve the distribution of a percentage of the net profits achieved by the company due to the sale of a fixed asset or compensating thereof provided that such distribution would not result in preventing the company from restoring its shares to their original status;
  • to approve issuing the debentures and guarantees granted to their holders;
  • to look into the decisions and recommendations of the debenture-holder’s group;
  • to authorise the founders and BOD members to conclude compensation contracts of sale with the company; and
  • to authorise the BOD to grant donations when such a donation exceeds EGP1.000.

Issues Concerning the Company’s BOD

  • to dismiss the BOD or one of its members, even if it was not included in the agenda, as well as filing liability lawsuits against them;
  • to dismiss the members of the BOD who have repeatedly not attended the general assembly meetings and the election of other members;
  • to impose monetary fines on those BOD members who fail to attend meetings without an acceptable excuse;
  • to authorise the Managing Director to occupy the position of Managing Director in another company;
  • to authorise the BOD member to take up a technical or administrative position in another joint-stock company permanently;
  • to authorise the BOD member to carry out his or her own business or for third parties in one of the fields of activity exercised by the company;
  • to carry out any management work in the event that the BOD member fails to reach a decision thereof due to the non-fulfilment of the quorum;
  • to ratify any act undertaken by the BOD; and
  • to issue recommendations with regard to work that falls within the competencies of the BOD.

Issues Concerning the Auditor

  • to change the auditor during the fiscal year;
  • to dismiss the auditor or file claims against him or her; and
  • to consider the auditor’s annual report.

Issues Concerning the Liquidation of the Company

  • to appoint the liquidator, determine his or her fees and to dismiss him or her;
  • to extend the period prescribed for the liquidation process after reviewing the liquidator’s report;
  • to approve the temporary account submitted semi-annually by the liquidator;
  • to ratify the final account of the liquidation process; and
  • to specify the place where the company’s ledgers and documents are to be kept after de-registration of the company from the commercial register.

According to Article 67 of the Law and Article 225 of its Executive Regulations, the OGM shall be validly held, provided shareholders representing a minimum of 25% of the capital attend. The company’s legal statutes can stipulate a higher quorum provided that this quorum does not exceed 50% of the capital. In the event that this quorum is not reached, the General Meeting shall convene for a second meeting to be held within 30 days following the first meeting.

The OGM notice to convene the first meeting will be considered sufficient with respect to the second meeting, provided the date and place for the second meeting is included therein. The second meeting shall be considered valid regardless of the percentage of shares represented.

Resolutions of the General Meeting shall be passed by a simple majority of the shares represented in the meeting.

The Extraordinary General Meeting (EGM)

According to Article 68 of the Law, the EGM shall be in charge of amending the statute or articles of association of the company while taking the following into consideration:

  • it is not permissible to increase the liabilities of the company’s shareholders. Each and every resolution adopted and issued by the General Assembly that would affect the basic rights of the shareholder which he or she derives as a partner shall be null and void;
  • it is permissible to add related, complementary and/or similar activities within the limits of the company’s field of activity, given that the main activity of the company may not be altered unless for reasons approved by the competent administrative authority; and
  • the EGM shall be entitled to consider extending the duration of the company or shortening it, dissolving it prior to the expiry date, or change the rate of loss which would result in the mandatory dissolution or merger of the company.

According to Article 227 of the Executive Regulations of the Law, the EGM shall, in particular, consider the following amendments in the company’s statutes:

  • increase of the authorised capital;
  • approval of the increase of capital by means of the preferential shares, provided that the statutes give room for this;
  • adding purposes complementary, connected or similar to the original purpose of the company. The original purpose shall only be changed for reasons approved by the committee prescribed by the Law based on a proposition accepted by the EGM;
  • the amendment of the rights, privileges or restrictions with regard to the types of shares; and
  • the extension or shortening of the company’s duration, dissolving it prior to its termination date or changing the percentage of loss which will result in the compulsory dissolution or merging of the company.

According to Article 69 of the Law and Article 227 of its Executive Regulations, in the event that company losses reach or exceed half the level of the issued capital, the BOD shall have to take the initiative of inviting the EGM to meet in order to look into the dissolution or the continuation of the company.

According to Article 70 of the Law and Article 226 of its Executive Regulations, the EGM shall meet by way of an invitation to convene issued by the BOD. The BOD shall issue an invitation given that it is requested by a number of shareholders representing at least 10% of the capital, if for plausible reasons and upon the condition that the applicants deposit their shares at the head office of the company or with one of the authorised banks. Those shares may not be withdrawn until after the dissolution of the assembly.

If the BOD does not invite the assembly to convene within one month from the date of presentation of the application thereof, applicants may submit their applications to the competent administrative entity which shall issue the invitation to convene.

According to Article 70 of the Law and Article 229 of its Executive Regulations, subject to the provisions relating to the OGM, the following provisions shall apply to the EGM:

  • an EGM shall be invalid unless attended by shareholders representing a minimum of 50% of the capital. If the minimum limit is not fulfilled at the first meeting, the assembly must be invited to a second meeting, to be held within 30 days following the first meeting. The second meeting is considered valid if attended by a number of shareholders representing a minimum of 25% of the capital; and
  • the resolutions of the EGM shall be adopted and issued by a majority of two thirds of the shares represented at the meeting. If the resolution is related to an increase in the capital or a reduction thereof, the dissolution of the company prior to the time limit, a change in the original object thereof or its merger, a prerequisite of a majority of three quarters of the shares represented at the meeting is necessary to validate and adopt the resolutions.

According to Article 61 of the Egyptian Companies Law No 159 for the year 1981 and Article 215 of its Executive Regulations, the General Assembly convenes upon invitation of the company’s Chairman or the Managing Director(s) at least once annually within a period of three months following the end of the fiscal year.

The shareholders have the right to call for an ordinary general assembly meeting, provided that it is requested from the board of directors by shareholders who own at least 5% of the company’s capital. In addition, the shareholders have the right to call for an extraordinary general assembly meeting, provided that it is requested by shareholders who own at least 10% of the company’s capital.

The invitation/notice in respect of a shareholders’ meeting shall be published twice in two daily newspapers, and at least one of them should be in Arabic. At least five days should elapse between the first and second publication. However, if the company is not publicly traded, sending the invitations/notices to the shareholders would be sufficient. The invitations/notices should be sent 21 days prior to the meeting date (excluding the date of sending/publishing and the date of the meeting). If the first meeting is not quorate, the invitations/notices for the second meeting should be sent/published at least seven days prior to the second meeting date.

The invitation/notice should include the following:

  • the name and headquarters of the company;
  • the type of company;
  • the authorised and issued capital of the company;
  • the commercial register number and place;
  • the location, date and time of the meeting;
  • state whether the meeting is an ordinary general assembly meeting or extraordinary general assembly meeting; and
  • the agenda of the meeting; however, if there is an urgent matter raised during the meeting, it can be discussed.

There are certain resolutions that should be resolved by an OGM, while others required an EGM. The OGM resolutions are adopted by a simple majority of the number of votes of the shares represented at a quorate meeting, unless the company’s articles of association states a higher percentage. On the other hand, the EGM adopts its resolutions by a majority of two thirds of the shares represented in the meeting. Certain other resolutions require a majority of three quarters of the shares represented in the meeting or three quarters of the share capital.

As for the quorum, the ordinary general assembly meeting may only be valid if attended by shareholders holding at least 25% of the company’s share capital, unless the articles of association of the company states a higher percentage, provided that it does not exceed half of the capital. If the OGM is not quorate a second meeting shall be held, within 30 days from the date of the non-quorate meeting, and shall be deemed quorate regardless of the number of shares represented therein.

The extraordinary general assembly meeting may only be valid if attended by shareholders holding at least 50% of the company’s share capital. If the extraordinary general assembly is not quorate, a second meeting shall be held and shall be deemed quorate if attended by at least 25% of the company’s share capital.

It is worth noting that the shareholders who own 5% of the company’s shares are entitled to add some issues to the agenda of an ordinary general meeting. Also, if there is an urgent matter raised during the meeting, it can be discussed even if it is not included in the agenda.

In principle, the board of directors is responsible for the management of the company. However, certain resolutions shall be resolved by a general assembly, whether an OGM or EGM as detailed in 1.8 Shareholder Approval above.

Egyptian law has recently been amended introducing the concept of “proportional representation”, where the articles of the company may require a minimum percentage of the share capital to be represented in the board of directors. This concept grants the minority shareholder the right to be represented on the company’s board of directors. In principle, the companies are not obliged to adopt this concept; however, Egyptian law obliged the listed companies to adopt the accumulative vote concept in order to guarantee the proportional representation to the extent possible.

The shareholders are entitled to appoint/dismiss/sue the board of directors through an OGM.

The shareholders representing 10% of the company’s share capital may request from the competent authority an investigation into the board of directors regarding the material breach in their role according to the laws or the articles of association of the company.

Moreover, each shareholder can sue the board of directors in the event of their default while undertaking their role.

The shareholders are entitled to appoint/remove the auditor of the company by virtue of a resolution to be issued by the OGM

Egyptian law does not oblige the shareholders to disclose their interest in the company. However, every board member is obliged to disclose any interest in the company and is not entitled to vote on the matter in which he or she has an interest.

It is worth noting that the interest of the shareholder in a company may take the form of a related-party agreement concluded with the company. In such a case, it shall be disclosed and pre-approved by an ordinary general assembly.

Shareholders are entitled to grant security interests over their shares. If the shares are pledged, the shareholders’ ledger shall reflect this.

The most usual method for share disposition is the sale of shares.

Generally, the shareholders have an unrestricted right to dispose of their shares, subject in all cases to the Articles of Incorporation. However, Egyptian law includes some mandatory restrictions to be applied in certain cases. For example, the founders of a company are not entitled to sell their shares within the first two financial years of the company, unless the company is established according to the investment law and the value of the shares are paid in cash. The same restriction applies to the shareholders who subscribed in the company’s shares through in-kind consideration.

The Capital Market Law restricts the disposal of a percentage of shares for a pre-determined period of time. For example, in certain situations the main shareholders in listed companies (the shareholders who own at least 10% of the company’s share capital, whether directly or through its subsidiaries) should maintain at least 51% of their owned shares in the company for two financial years from the date of its offering or listing. Where the total number of maintained shares, according to the aforementioned percentage, is less than 25% of the company’s shares, that percentage shall be reached through the shares owned by the members of the board of directors, founders or the shareholders.

Other than the Articles of Incorporation, a shareholders’ agreement is the main contractual framework for arranging the relationship between the shareholders. Such an agreement can include restrictions regarding the sale of shares, such as lock-ups, the right of first refusal and the right of first offer. As mentioned above, the shareholders’ agreement is enforceable between its parties; however, in order to be enforceable vis-à-vis the other shareholders, it must be approved by the extraordinary general assembly. Egyptian law requires a minimum of three quarters of the company’s share capital to approve the shareholders’ agreement or a percentage of more than three quarters if the agreement provides restrictions on the disposal of the shares.

If the company is in the process of liquidation, the shareholders are entitled to:

  • appoint/dismiss the liquidator through an ordinary general assembly meeting;
  • request information and data to the extent that such information or data does not affect the interest of the company or delay the liquidation process;
  • extend the duration of the liquidation after reviewing the liquidator’s report;
  • claim for compensation for any damage resulting from the default of the liquidator;
  • ratify the final account of the liquidation;
  • specify the place where the company’s ledgers and documents shall be kept after delisting the company from the commercial register; and
  • look into the temporary account to be submitted by the liquidator.

The company may be liquidated before the expiry of its term by virtue of a resolution to be issued by an EGM. Moreover, Egyptian law obliges the board of directors to call for an EGM meeting where the company losses reach or exceed half the level of the issued capital. In such a case, the shareholders are entitled to wind up the company or approve its continuation.

After liquidation, the shareholders are entitled to receive their share of the proceeds of the liquidation.

The concept of shareholder activism is not explicitly recognised or regulated under Egyptian law nor is it common practice as far as listed companies on the EGX (the Egyptian Exchange) are concerned. There are no specific laws or regulations that govern or restrict shareholder activism, although Egyptian law has enshrined general principles that are designed to protect minority shareholders.

Furthermore, each shareholder in a listed company must disclose to the Egyptian Exchange if his or her ownership combined with that of his or her related parties increased or decreased by 5% of the capital or voting rights of a listed company.

In addition, disclosure is required if any of the following purchased 3% or more of the company’s stocks:

  • the members of the board of directors;
  • the employees; and
  • any person considered as a related party to the aforementioned.

Moreover, listed companies have periodic disclosure obligations regarding their shareholding structure, the number of shareholders, the board of directors’ structure and any changes that have been made to these. Listed companies are also obliged to notify the Egyptian Exchange immediately with any material changes or events.

Furthermore, one of the listing requirements is to submit a summary of all the agreements concluded between the company or its subsidiaries and any of the shareholders who own at least 5% of the company’s capital, board members or the executive directors.

Minority shareholders are entitled to request the annulment of the resolutions resolved by an ordinary general assembly if it has been resolved without considering the best interest of the company. Additionally, Egyptian law also states that any resolution issued by the general assembly that affects the essential rights of the shareholders shall be deemed null and invalid.

Also, the General Authority for Investment and Free Zones has recently set out that each preference share has a maximum of two votes unless three quarters of the share capital has approved otherwise. This will mitigate the voting power of the shareholders who own preference shares.

In light of the above, although Egyptian law does not have a specialised unified law regulating or restricting shareholder activism, there are certain provisions to mitigate the shareholder activism to the extent possible.

It is worth noting that shareholder activism can also be mitigated through the shareholders' agreement, which is enforceable under Egyptian law.

Historically, shareholder activism was not prevalent in Egypt nor was it common in practice, although this has gradually changed over the last 18 months, where limited random cases of shareholders’ activism have been observed. One of the main reasons underlying such change in the shareholder activism landscape is attributed to sponsors and controlling shareholders gradually divesting shares or being subject to dilution because of capital raise where their shareholding in the company has fallen below 50% of the shares and hence became susceptible to shareholder activism.  Another important reason that has fuelled shareholder activism is the amendment of the regulatory regime and corporate governance for listed companies and where the voting on certain resolutions is not restricted to the free float, as is the case with voting on financial assistance-related resolutions.

The most common strategies employed by activist shareholders are as follows:

  • gradually building stakes in the company;
  • lobbying with other shareholders to form a consolidated voting block; and
  • forcing changes to the board of directors of the company.

Whilst shareholder activism remains generally limited in Egypt in comparison with the same in Europe and the US, the sectors where shareholder activism was recently seen include real estate and fast-moving consumer products.

It remains challenging to observe or identify trends in terms of the market capitalisation of companies targeted by activist shareholders in light of the scarcity of this happening in practice.

Typically, in Egypt, hedge funds and family offices are more active than others as far as shareholder activism is concerned.

There is no available information regarding public activist demands in the last year in Egypt, either in full or in part.

Some of the particular strategies a company considers when responding to an activist shareholder include:

  • changes to the board of directors;
  • a rights issue via private placement to be exclusively subscribed by a new investor to dilute the existing shareholder base; and
  • court litigation to try to obstruct the actions of an activist shareholder via judicial action.

Egyptian law recognises the separate legal personality of a company.

The joint-stock companies and the limited liability companies are the role model for separate legal personality under Egyptian law. The shareholders or quota-holders under these types of companies are liable to the amount paid for their shares or quotas only, enshrining the concept of the “corporate veil”.

There is no restriction under Egyptian law that prevents the shareholders from claiming for legal remedies against the company, whether such resolutions are undertaken by the board of directors or the general assembly.

The shareholders may require the annulment of every resolution passed by the General Assembly that is:

  • in violation of the provisions of the law or the company's statutes;
  • issued in favour of a certain class of shareholders, or is designed to prejudice or harm a specific class of shareholders;
  • intended to benefit members of the board of directors or a specific shareholder or group thereof, in disregard of the interests of the company.

In this case, the request for nullification can only be made by the shareholders who objected to the resolution in the minutes of the meeting or who failed to attend for a plausible reason.

Furthermore, it is possible for a shareholder to claim for legal remedies against the company in the situation where the shareholder concluded an agreement with the company. In this respect, if the company breaches the terms and conditions of the agreement, the shareholder may claim for legal remedies. It is worth noting that, in this regard, the shareholder is claiming for legal remedies as a contractor with the company, not in his or her capacity as a shareholder.

Civil Liability

Under the Companies Law

  • under the Companies Law, BOD members are liable for any damage caused by any of their wrongful acts committed in the course of carrying on their duties. These include acts contravening the Companies Law;
  • pursuant to Article 102 of the Companies Law, the fact that the wrongful act or resolution is passed, authorised or ratified by the shareholders' meeting shall not release the directors from liability for that act or resolution. However, if the wrongful act or resolution was presented to the shareholders’ meeting in a report prepared by the BOD or the company’s auditor, the right of recourse against the directors shall be time-barred after the elapse of one year after the date of ratification by the shareholders’ meeting of the BOD report. It should be noted, however, that if the wrongful act constitutes a crime, the limitation period would extend until the end of the limitation period of that crime;
  • under the same Article, the company’s shareholders have the right to direct recourse against the directors and any provision in the company’s constitutional documents restricting that right would be deemed null and void;
  • if the BOD action contravenes the Companies Law (and hence is voidable), those directors and other persons who participated in carrying out such action shall be jointly liable for the losses suffered as a result of such action. Claims requesting the nullification of such action shall be time-barred after the elapse of one year after the claimant becoming aware of that action;
  • one of the powers of the annual general assembly is to release the BOD members from any liability arising out of the BOD membership and related actions for the preceding financial year. Furthermore, it is worth noting that a company may indemnify its directors in respect of proceedings brought by third parties against the directors as a result of undertaking their duties in managing the company. The company may also take out an insurance policy in favour of its board of directors' members to cover liability vis-à-vis third parties. Any such insurance and/or indemnity must comply with the limitations set out under law.

Under the Trade Law

  • under Article 704 of the Trade Law No 17 of 1999, if the company’s funds do not suffice to repay at least 20% of its debts, the court may order the members of the board of directors, or some of them, whether jointly or otherwise, to pay some or all of the company's debts, unless they establish that they have been running the company’s affairs with the same care as that of a prudent person;
  • the court may further deprive any of the BOD members from any of the following rights:

a)       to vote or become a member of the parliamentary councils, local councils, the chambers of commerce or industry or the professional unions, to be a director or member of any board of directors of any company, to work in banks' activities, commercial agencies, import and export works, or brokerage in selling or buying securities, or selling by public auction; or

b)       to act as an agent of third parties in managing their assets.

Criminal Liability

General

  • pursuant to the general principles of the Egyptian penal law, criminal liability is personal in nature. Accordingly, a director will not be held criminally liable unless that director commits a crime or the relevant legislation provides for specific criminal liability of the director in certain events. To explain, Egyptian law does not recognise a general theory of corporate criminal liability. However, the criminal liability would arise in respect of the executives and executive directors who are involved in the offence and would not arise in respect of non-executive directors unless it is established that they are involved.

Under the Companies Law

  • Article 162 of the Companies Law provides, inter alia, that the following corporate crimes are punishable by at least two years' imprisonment and/or a fine ranging from EGP2,000 to EGP10,000, without prejudice to any other harsher punishments under any other law:

a)       falsifying the registers, annual accounts or other documents that should reflect the legal and financial position of the company or presenting reports to the shareholders’ meeting, including false or incorrect information, in a manner that may affect the outcome of the resolutions of the shareholders’ meeting;

b)       distributing dividends or making distributions to the shareholders in breach of the provisions of the Companies Law or the articles of incorporation of the company.

  • in addition, Article 163 of the Companies Law provides, inter alia, that the following corporate crimes are punishable by a fine ranging from EGP2,000 to EGP10,000, without prejudice to any other harsher punishments under any other law:

a)       intentionally delaying the calling for a general assembly meeting (this only applies to BOD members);

b)       violating any mandatory provision of the Companies Law. 

Under the Capital Markets Law (CM) Law and EGX Rules

  • under the CM Law, certain actions are subject to criminal liability, pursuant to the provisions of that law;
  • in addition, Article 63 of the CM Law provides that any fraudulent action made to impact the market price is punishable by imprisonment for a period not exceeding five years and/or a fine ranging from EGP50,000 to EGP20 million. This shall be without prejudice to any harsher punishments under any other laws;
  • further, Article 67 of the CM Law provides that any violation of the Executive Regulations of the CM Law is punishable by a fine ranging from EGP2,000 to EGP1 million. This shall be without prejudice to any harsher punishments under any other laws;
  • under Article 68 of the CM Law, the person carrying out the effective management of the relevant company shall be subject to the penalties imposed on the company in the case of a breach of any of the provisions of the CM Law. The relevant company must guarantee the payment of any imposed fines.

Under the Penal Code

  • under Article 113 (bis) of the Egyptian Penal Code No 58 of 1937 (Penal Code), a punishment of not more than five years' imprisonment shall be imposed on any BOD member who commits misappropriation of the funds of the company for their own benefit or for the benefit of third parties.

Under the Bankruptcy Law

•       Articles 252, 253 and 255 of the Bankruptcy Law No 11 of 2018 impose a penalty of imprisonment for a period of not less than three years and not more than five years and a fine of not less than EGP50,000 and no more than EGP500,000 on a BOD member who causes the bankruptcy of the company by fraud.

•       Articles 254, 256 and 257 of the Bankruptcy Law impose a fine not less than EGP50,000 and no more than EGP200,000 on a BOD member who causes the bankruptcy of the company by negligence.

Egyptian law grants the right to shareholders, including minority shareholders, to request the annulment of the resolutions resolved through a shareholders' meeting, provided that the requesting shareholder did not approve that resolution or was not attending the meeting for an acceptable reason. It is worth noting that the Companies law stipulates that the limitation period for the lawsuits initiated by shareholders against other shareholders is five years from the end date of liquidation. Accordingly, it should be noted from this provision that Egyptian law adopts the concept of a shareholder to claim for legal remedies against another.

Under the Companies law, the auditor is responsible and liable to compensate the company for any damage or loss that has occurred to any shareholder, provided that the damage resulted from his or her fault.

Generally, the chairman of the board of directors is the competent person to represent the company before courts. However, in certain situations, the Companies law grants a shareholder the right to bring derivative actions on behalf of the company, such as to request the annulment of the resolutions if issued without considering the interest of the company, provided that the shareholder did not approve the resolution or did not attend the meeting because of an acceptable justification.

The main factors that the shareholders should typically consider are the limitation periods, the capacity of the defendant, and the required methods of evidence.

Matouk Bassiouny & Hennawy

12 Mohamed Ali Genah
Cairo
Egypt

+202 2796 2042

+202 2795 4221

info@matoukbassiouny.com matoukbassiouny.com
Author Business Card

Trends and Developments


Egypt Keeps Beefing up Minority Shareholders’ Rights

Egypt has always been keen to improve its investment climate with a view to making it more attractive to both local and foreign investors. The devaluation of the Egyptian currency in November 2016 was a step in the right direction, creating an additional incentive for foreign investors to consider investing in Egypt. This has been demonstrated by a number of renowned international private equity and investment banking firms taking the decision to open offices in Cairo during the last few years. To keep the momentum going, the Government hastened to launch a series of legal reforms addressing major concerns of both local and foreign investors’, in particular those related to corporate governance and exit rights. 

Over the past two decades, Egypt has demonstrated a strong will to adopt sound corporate governance rules in line with international best practices. This has been reflected in extensive co-operation with leading international organisations, such as the OECD and the World Bank, and the introduction of several reforms to the main laws and regulations addressing the governance of companies, namely the Egyptian companies law No 159 of 1981, as amended (the 'Companies Law'), the capital markets law No 95 of 1992, as amended (the 'Capital Markets Law') and their respective executive regulations and the EGX Securities Listing and Delisting Rules (the 'Listing Rules').

Particular emphasis has been laid on enhancing minority shareholders protection rights. The Egyptian Companies Law and the Capital Markets Law have always included a number of standard minority protection rights in line with the international best practices, such as the right to information or attendance of the general assembly meeting etc. However, proportional representation on the board of directors and regulation of exit rights were not addressed in the laws. Minority shareholders wishing to regulate such rights, had no alternative but to include them in the shareholders’ agreement.

The shareholders' agreement, as qualified by the law, is simply a private contract between the shareholders and not binding on the target company itself, nor the shareholders who are not party to it. The only remedy for a breach is to resort to the dispute resolution mechanism set out in the agreement and claim damages for a breach of contract. Whilst some of the corporate governance rights regulated in the shareholders' agreement could be reflected in the statutes of the company and as such could be enforceable, exit rights, such as right of first refusal, put option, call option, tag-along and drag-along, could not. As a result, a shareholder could, in breach of the shareholders' agreement, ignore such exit rights and transfer its shares to a third party without observing the agreed upon provisions. The remedy of specific performance in respect of these exit rights was not available except in rare cases. 

This gap in the law has resulted in foreign investors resorting to minority shareholders’ friendlier jurisdictions to set up their holding company or fund. The Egyptian legislator responded by introducing, in 2018, several legal reforms to the Companies Law and the Capital Markets Laws. The main two legal reforms granting minority shareholders the long-awaited protection layers required by investors revolve around governance and exit strategy.

Proportional Representation and Cumulative Voting

The general rule, under the Egyptian Companies Law, for the election and appointment of directors in any company was that an election or appointment was usually done through the simple majority passing of a resolution in an ordinary general assembly meeting. As such, the Companies Law was not ensuring a fair representation of minority shareholders, or a significant minority as large as a minority holding 49% of the share capital of the company. This process resulted, in most cases, in leaving a significant minority unrepresented on the board of directors.

In its efforts to protect the best interests of minority shareholders, the board of directors of the Egyptian Financial Regulatory Authority ('FRA') issued decree No 154 of 2018, amending the Listing Rules to the effect that it has now become an obligation for listed companies, and companies working in the non-banking financial sector, to amend their articles of association to ensure a cumulative voting system when electing their board members.

The aim of this new decree is to allow proportional representation on the board whenever possible and cumulative voting helps strengthen the ability of minority shareholders to elect a director. This method allows shareholders to cast their votes for one or more nominees for the board of directors when the company has multiple openings on its board. In addition, the proportional representation guarantees one or more seats on the board for the minority shareholders.

The Listing Rules define cumulative voting and proportional representation as follows: 

  • Cumulative Voting- means that each shareholder 'shall give all its votes for one or more candidate in such a manner that allows the proportional representation in the membership of the board of directors, whenever possible'. 
  • Proportional Representation- means the system that 'guarantees the representation of the minimum of equity ratio in the company’s board of directors without exceeding one seat for each 10% of the company’s share'.

Unlike closed (private) companies, for whom the newly introduced provisions in the Companies Law stipulating that the articles of association of a closed company may, but are not mandated to, include cumulative voting and proportional representation in the election of a board of directors, the Listing Rules provide that cumulative voting is mandatory for listed companies to allow for proportional representation whenever possible.

Following the issuance of this amendment, the current trend is for investors acquiring a minority stake in a company to require the amendment of the statutes of any closed company they intend to acquire as a pre-condition of the acquisition. For existing listed companies, to which such an amendment is mandatory, minority shareholders started to request that companies adjust their position as per the new requirement of the law if they have not already done so. If the necessary general assembly meeting for the implementation of such an amendment is not held, they resort to the relevant Governmental Authority to enforce the implementation of cumulative voting and proportional representation.

The Governmental Authorities recently received a number of requests from minority shareholders to implement such new provisions. However, the FRA issued a periodical report on 25 June 2019, extending the time frame during which listed companies should comply with the new requirements of the law and adjust their position to the end of the 2019.

As recently as 29 September 2019 the FRA has taken a further step in improving minority rights in terms of gender representation on boards of directors by including a mandatory requirement for companies wishing to become publicly listed to have at least one female on their board.

Strengthening the Position of Shareholders' Agreements

The statutes of a company are considered by the Egyptian law as the only official documents governing the relationship between shareholders and the company on one hand and the relationship between shareholders on the other. Since the statutes are usually standardised by competent ministry and cannot, therefore, be subject to major changes by shareholders, shareholders of closed companies frequently opt to enter into an extra-statutory act, complementary to the statutes, to include stipulations that meet their respective needs within the framework of applicable laws but which cannot be included in the standard statutes.

A shareholders' agreement is a confidential and private contract that binds only its signatories. In other words, it is an agreement not subject to any conditions of registration with Governmental Authorities. Unlike the statutes that bind all shareholders, a shareholders' agreement can bind only its signatories and is not subject to any conditions regarding its form.

Investors in almost all the acquisitions that took place in the market during the last few decades were always keen to enter into shareholders' agreements with the remaining shareholders. Such agreements were crucial, in particular, for the protection of minority shareholders' agreements on reserved matters and exit strategy which could not be included in the company’s statutes. In the event of a contradiction between provisions of the law and those of the shareholders' agreement, the statutes prevail.

Violation of shareholders' agreements used to be sanctioned less rigorously than violation of the statutes. Compensation for the damages of violation was the only action provided for with no further requirements on the part of the defaulting party, except in some rare cases.

As shareholder agreements were more difficult to enforce than corporate statutes, shareholders sought to reflect their content in the statutes to make them enforceable vis-à-vis third parties, all shareholders (present and future) and the company itself. Until 2018, this has only been possible for certain provisions concerning corporate governance and certain minority shareholder rights in terms of increasing the percentage required for the quorum of attendance of general meetings or board meetings and certain reserved matters.

The normal result of this practice, together with the ambiguity surrounding the execution and effectiveness of shareholder agreements in Egypt, has been that investors have tended to set up their companies in jurisdictions whose laws allow for the enforcement of stipulations that meet their needs as well as those relevant to their rights of exit (call option, put option, tag-along and drag-along etc).

The legal reform introduced the new Article 9bis to the Companies Law and the new Article 2bis of its executive regulations. Under these two articles shareholders may, before or after the company's incorporation, enter into a shareholders' agreement governing their inter-relations. This agreement is effective vis-à-vis non-signatory shareholders only if the extraordinary general meeting of shareholders adopts and approves this agreement by a two-thirds majority of the votes presented at the meeting or by a greater majority in the following cases:

  • if the shareholders' agreement contains additional rights in terms of voting rights, profit-sharing or the outcome of the liquidation;
  • if the shareholders agreement falls within the framework of commutative contracts; and/or
  • if the shareholders' agreement includes particular arrangements and limitation on the transfer of shares or on the liquidation of the company.

With the introduction of the Article 9bis and Article 2bis, the Egyptian government finally recognised the shareholders' agreement and implicitly authorised its annexation to the corporate statutes. However, the mechanisms for the enforcement of its provisions, in particular the exit provisions, have not yet been determined by Governmental Authorities.

All the same, there is no doubt that the continuous effort being made by both the legislator and the Governmental Authorities to improve corporate governance, as demonstrated by recent amendments to the Companies Law, the Listing Rules and the Capital Markets Law, send a positive message to investors, especially minority shareholders.

The continual education of investors, as well as the comprehensive training of government officials entrusted with the application of the relevant laws and regulations, is highly recommended to reap the intended benefits of the legal reforms.

Zaki Hashem & Partners

23 Kasr El Nil Street
Cairo 11211
Egypt

+202 2399 9999

+202 2393 3585

law@hashemlaw.com www.hashemlaw.com
Author Business Card

Law and Practice

Authors



Matouk Bassiouny & Hennawy is a full-service independent regional MENA law firm based in Cairo, Egypt (Matouk Bassiouny & Hennawy), with offices in UAE and Sudan, and country desks in Algeria and Libya. The firm specialises in advising multinationals, corporations, financial institutions and governmental entities on all legal aspects of investing and business in the region. The team of 19 partners and more than 145 lawyers are trained both locally and internationally and are fluent in English, Arabic and French. The Corporate Group’s primary goal is to provide top-level general corporate and mergers and acquisitions advice to clients, including to a wide range of multinational corporations, private equity firms, fund managers and blue-chip investors in Egypt and in the region. Headed by Omar S. Bassiouny, founding partner and Tamer El Hennawy, executive partner and group co-head, the Corporate Group consists of nine partners and over 60 lawyers.

Trends and Development

Author



Zaki Hashem & Partners was established in 1953 and is one of the oldest and largest law firms actively supporting foreign and local investors in the Egyptian business sector. ZH&P provides a full range of corporate, business and commercial legal services through 100 fee earners and 170 employees who specialise in a wide range of practice areas including banking and finance, capital markets, compliance, corporate and commercial, dispute resolution, franchise, insurance, international foreign investment, international trade and mergers and acquisitions. International clients include, among others, EFG Hermes, Beltone Capital, Actis LLP, Accelero Capital and Planet Investment, Vodafone Egypt Telecommunications S.A.E., BIOMERIEUX, IOS Partners Inc., Sisecam, Società Italiana per Condotte d’Acqua S.p.A and Taylor Wessing.

Compare law and practice by selecting locations and topic(s)

{{searchBoxHeader}}

Select Topic(s)

loading ...
{{topic.title}}

Please select at least one chapter and one topic to use the compare functionality.