Issue 100, 22 February 2018

KEY CHANGES TO THE COMPANIES LAW AND THE ER NEW AMENDMENTS.

Egypt’s regulatory framework is racing against time to keep path with the crucial and dynamic changes to Egypt’s economic and investment environment.  With a number of implemented reforms and others scheduled for 2018, and after issuing the New Investment Law back in July, the government introduced some amendments to the Companies law No. 159/1981 (the “Companies’ Law”). On 16 January 2018, the Egyptian President issued Law no. 4/2018 (the “New Amendments”); three weeks later the Ministry of Investment and International Cooperation issued the Executive Regulation (the “ER”) of the New Amendments, but not officially. The enactment of the New Amendments was to ameliorate Egypt’s’ ranking in international reports of doing business and to help bringing the economy to its full potential.

The New Amendments introduced some new provisions and amended others; these amendments cover subjects ranging from introducing a new type of company, to amending companies’ incorporation provisions, in addition to granting extra powers to the General Authority for Investment (the “GAI”), etc.

The following is a brief outline on the key changes introduced by the New Amendments, here are the big changes:

  • Sole Person Company:

One of the significant new changes in the New Amendments is introducing a new type of company whereby an individual, whether a natural or juristic person, may solely establish a company (the “Sole Person Company”).

The Sole Person Company is a limited liability company in which the founder is only liable within the limits of the capital of the company. However, the New Amendments also set forth certain limited cases where the corporate veil of the Sole Person Company may be pierced and the founder is held jointly liable with the company, including cases of compromising the separation of financials between the company and the founder and cases of fraudulent liquidation. [Read more…]

Establishment and Capital of the Sole Person Company

– The New Amendments requires the capital of the Sole Person Company be paid in full at the establishment of the company.

– The ER determined the minimum capital required for the establishment of the Sole Person Company by a minimum capital of EGP50’000.

Management and Founder’s Mandates

The founder of the Sole Person Company runs all corporate aspects relating to the company.

The founder of the Sole Person Company is also allowed to conclude agreements between himself as an individual and between the company, provided that such agreements do not compromise the financial separation between the founder and the company.

The New Amendments allow JSCs, Partnerships Limited by Shares and LLCs to transform into a Sole Person Company in the event that the respective minimum number of shareholders/partners under the Companies’ Law for these companies can no longer be met.

Restrictions

Sole Person Companies are prohibited from undertaking the following activities:

– founding of another Sole Person Company;

– undergoing public subscription (whether at the establishment of the company or during capital increase);

– splitting the capital of the company into tradable shares;

– borrowing through issuing securities; or

– undertaking the activities of insurance, banking, savings or receipt of deposits on behalf of third parties.

Obligatory Liquidation of the Sole Person Company

The Sole Person Company will be put into liquidation by Law in the following cases:

– losses exceed half the capital of the company (unless the founder resolved the continuity of the company regardless);

– liquidation of the juristic person that is the founder of the company;

– incapacity of the founder; or

– death of the founder (unless the heirs resolved to the continuity of the company in accordance with the Companies’ Law)

  • Share Dematerialization is not an Option?

JSC companies are required to dematerialize and deposit their shares with the Egyptian central depository (MCDR) as an incorporation requirement. While this is not a new requirement as it was first imposed by the old Investment Law amendments in 2015 and subsequently in the New Investment Law no. 72/2017, it was not strictly applied by the GAI.Share Dematerialization is not an Option?

The New Amendments seem to be more firm about applying this requirement since even existing JSCs that currently hold physical shares are given one year reconciliation period that will lapse by 15 January 2019 to complete the dematerialization and deposit of their shares with MCDR.

For new companies, the MCDR requirements for dematerialization will have to be in alignment with the new requirement to allow an interim certificate of deposit to be issued before the incorporation process in completed.

  • More Minority Protections, More Teeth to GAI 

The New Amendments introduce more corporate governance rules and minority protections. In addition, more injunctive powers are granted to GAI to take active measures against corporate governance violations, majority abuse and fraudulent corporate actions.

Among the significant minority protections introduced under the New Amendments:

  • right for minority to include in the articles of association minimum minority representation in the board of directors, but not exceeding one board seat for each (10%) of ownership;
  • right for shareholders having at least (5%) of the company’s shares to get information and copies of contracts and documents of related party transactions and to request GAI to mandate the company to make such information and documents available in cases of non-compliance by the company; and
  • right for shareholders having at least (5%) of the company’s shares to request GAI to suspend decisions of the general assembly of the company that are taken in abuse of their rights or to bring an interest to specific shareholders or directors. Such suspension is only interim and the shareholder must file annulment claim against the decision at the relevant court within thirty days of GAI’s suspension decision or such suspension will expire.

In the same direction of fostering corporate governance and minority protection, the New Amendments granted the GAI more power in terms of:

  • power to reverse and object capital increases even after finalization and annotation in the commercial register in cases of fraud, violation to the Egyptian Accounting Standards or substantial violations of the law and capital increase procedures;
  • power to order administrative estoppel of general assembly decisions and to mandate companies to present documents and contracts of related party transactions upon minority request as explained above;
  • power to inductively take the procedure of decrease the capital of the company in case of non-compliance with the rules of the retention and disposal of treasury shares.

Furthermore, the New Amendments set out the regime for reconciliation on violations and crimes under the Companies Law in exchange for reconciliation amount that is not less than double the minimum fine prescribed for the violation/crime in question. Such power of reconciliation is granted to the relevant Minister (i.e. Minister of Investment) and result in extinguishing all criminal procedures and estoppel of criminal penalty execution if reconciliation was made after a final verdict is issued. This concept is being

  • Treasury Shares

The treasury shares of unlisted companies should not exceed 10% of its issued capital. This limitation was regulated in the EGX listing rules for listed company. Now the restriction is applied on the unlisted companies as well.

The Company is under the same old obligation to dispose of the treasury shares within one year of acquisition or it shall undergo a capital reduction extinguishing any treasury shares retained beyond that period. However, the New Amendments added a restriction whereby disposals to a “subsidiary” or a “related party” to the Company shall not be admitted to satisfy the disposal requirement for treasury shares.

The ER set out the definition of the Subsidiary as “companies, which the Company contributes in by more than 50% of their capital or voting rights”. In addition, the ER defined Related Parties as, “(i) parties that are under the effective control of the Company, (ii) have an agreement with the Company in regards to voting at the General Assembly of the Company or its Board of Directors, or (iii) Also parties, in which the Company holds a percentage of the shares or voting rights that give the Company the effective ability to influence its decisions”.  

  • Regulating Shareholders’ Agreements (The “SHAs’”)

Now, shareholders’ agreements are regulated under the New Amendments allowing such agreements to become binding to other shareholders after the approval of the Extraordinary General Assembly by a special majority vote of 75% of the company’s capital (not only the capital represented in the general assembly).

The language in the New Amendments is rather broad and it remains to be seen in practice what does it mean for the SHAs to become binding to the other shareholders by virtue of such special majority affirmative vote.

In the absence of specific regulation before the New Amendments, the binding effect of SHAs was purely contractual between its parties offering only compensation claim in cases of breach. However, parties to SHAs could not have access to injunctive measures by GAI against corporate actions/procedures taken in breach of the SHAs, which were only available in cases of violations to the law or the company’s articles of association. Now it remains to be tested whether GAI will grant SHAs injunctive binding effect side-by-side to the articles of association or not and whether GAI would require some standards or prior scrutiny to SHAs in order to bestow such injunctive power upon them.

Another practical question to the binding effect of SHAs is relating to dispute resolution mechanisms, since recourse to arbitration is typical in such agreements. Accordingly, doubts arise as to whether submission to arbitration could be imposed to non-party shareholders via approval of the company’s general assembly, especially in cases of minorities.

  • Preferred Shares

Until the New Amendments, it was not permissible to issue preferred shares unless the articles of association of the company stipulated the terms and conditions of such preferred shares at the time of incorporation. Accordingly, practical use of preferred shares was extremely limited, since in most cases founders could not foresee or determine needs for preferred shares at incorporation phase.

The New Amendments overcome this obstacle by allowing amending the articles of association to include preferred shares after incorporation. Preferences can be granted in terms of voting, dividends or liquidation proceeds. However, it is not permissible for voting and liquidation proceeds preferences to be combined.

Practical issues especially in relation to process and assessment of fair value of capital increases through preference shares would remain to be seen.

  • Lock-up Period Still Remains

The two financial years’ lock-up period on founders’ shares and in-kind contribution shares remains unchanged. Despite, the confusion caused by the provisions of the New Amendments regarding the application of the lock-up period to founders’ share which promoted a conviction that companies may trade their shares without a lock-up period, the ER came clear that lock-up period still apply to all founders’ shares.

According to the previous legislation, the approach was that incorporation shares, founders’ shares and shares issued for contribution in kind may not be transferred (except in between the founders’ themselves) prior to the publication of the company’s financial statements for the first two fiscal years.

However, Article (45) of the New Amendments stipulates that, incorporation shares and in-kind shares may not be transferred prior to the publication of financial statements for two financial years. As a deviation from the previous legislation, it did not mention the founders’ shares. Therefore, the assumption was that lock-up period is now removed in regards to founders’ shares.

Nonetheless, the ER unequivocally clarified the position by explicitly stipulating in Article (136) that, founders’ shares shall not be transferred before the approval of the company’s financial statements for two financial years. Which got things back to the usual route.