Issue 90, 9 April 2017

Update on Corporate Governance Rules

• At the end of 2016, the board of directors of the Egyptian Financial Supervisory Authority (EFSA) issued a decision replacing the corporate governance rules applicable on companies working in securities defined below. The deadline for the complete adherence to all the corporate governance rules is 30 April 2017. We are sending out this update as a reminder of the new regulations and the obligations now in force on the addressed companies. Companies who fail to abide by these new rules may lose their licenses.

Let’s get the numbers out of the way:

• The new governance rules were issued by EFSA’s Board decision 107/2016, dated 25 September 2016, Regarding the Corporate Governance Rules of Companies Working in Securities (the “New Decision”) and by EFSA Board decision 84/2016, dated 26 July 2016, issuing the Egyptian Guide for Corporate Governance (the “New Guidelines”). The New Decision and the New Guidelines cancel EFSA Board decision 11/2007, dated 11 March 2007, regarding the Executive Rules for Corporate Governance of Unlisted Companies Working in Securities (the “Old Decision”) and EFSA’s Board decision 62/2007, dated 17 April 2007 issuing the Guide for Implementing the Executive Rules for Corporate Governance of Unlisted Companies Working in Securities (the “Old Guidelines”).

Which companies are addressed by these new rules?

• Companies working in the securities field, subject to the Capital Market Law 95/1992 and the Central Depository and Registry Law 93/2000 (the “Relevant Companies”). The new rules apply on both listed and unlisted companies, with unlisted companies being subjected to additional corporate governance rules.

When does the new rules apply?

• The rules entered into force since 13 October 2016; however, some of the provisions were given a grace period until 30 April 2017 (we clarify below the relevant time lines). Starting 1 May 2017, the rules should be fully enforced by the Relevant Companies.

A. THE BOARD OF DIRECTORS:

1. Definition of “Independent Board Member”  Generally speaking, the New Decision broadens the definition of the independent BOD member. We believe that the way the definition of the independent member is drafted gives more discretion to EFSA to interpret the article and conclude whether or not the BOD member is independent. The Relevant Companies have a grace period until 30 April 2017 to abide by this new definition.

2. Limitation on Term of Membership in BoD: The New Decision introduces a more liberal approach towards the duration of the membership in the BoD. As per the New Decision, the restriction regarding staying in membership for maximum six consecutive years is only applicable to the independent board member rather than the non-executive one. In application of the amended article, a non-executive member can stay in the BOD membership for more than six consecutive years. However, the independency of such member shall cease after the lapse of these six consecutive years. On the other hand, the New Decision cancels any exception from this rule, which was previously allowed.

3. Limitation on Membership in BoD of Another Company: We believe that the New Decision introduces a more liberal approach regarding the membership of the board member in more than one company. To clarify, the restriction on being a board member in more than one company is only applicable in case the relevant companies exercise the same type of activity. Further, there is now a carve-out from such restriction for sister or subsidiaries performing the same activities. We believe this amendment overcomes the previous impracticality faced by financial services group companies that have more than one arm performing the same activity.

B. BOD COMMITTEES:

1. Formation of BoD Committee: The New Decision mandates the involvement of independent members in the BoD Committees. Accordingly, the Relevant Companies should have adjusted the composition of their committees and included an independent member.

2. Risk Committee: The New Decision introduces a liberal approach. It made the establishment of a risk committee optional for companies in cases other than those specified under the relevant article.

3. Centralized BOD Committees: The New Decision introduces a more liberal approach in this regard and allows the Relevant Companies and their subsidiaries exercising securities activity to form only one centralized auditing committee (or one auditing committee and one risk committee, as the case may be, for the mother company (the holding company) and its subsidiaries. The New Decision provides conditions for this rule to apply. We believe this amendment is particularly relevant to financial services group companies.

C. INTERNAL AUDIT:

• Central Unit for Internal Audit: The New Decision introduces a more liberal approach in this regard, and allows the Relevant Companies and their subsidiaries exercising securities activity to form only one centralized internal auditing committee for the mother company (the holding company) and its subsidiaries. We believe this amendment is particularly relevant to financial services group companies.

D. DISTRIBUTION OF DIVIDENDS:

• Mandatory distribution of profits annually is not obligatory but rather subject to the general assembly’s decision. This liberalization is effective since 13 October 2016.

E. COMPANY’S AUDITOR:

• Appointment of Company’s Auditor: The Old Decision was not clear as to whether it is possible to re-appoint the auditor again one year later after the termination of his six-year term or not. The New Decision adopted a clear approach by applying athree-year lock-upon the auditor after reaching the maximum appointment period of six consecutive years. Literal application of the regulation may imply that the application of the said lock- up can be avoided by appointing the auditor for less than six consecutive years (e.g. five consecutive years), in which case, the lock-up will not be triggered and the same auditor may be re-appointed after only one year.The Relevant Companies have a grace period until 30 April 2017 to abide by this new article in relation to the reappointment of the auditor.

• If you want to see a before and after of the relevant articles discussed above, and our comments, please download this presentation.