Omar S Bassiouny and Muhammad Nassef of Matouk Bassiouny assess the M&A regulatory framework in Egypt
Section 1: GENERAL OUTLOOK
1.1 What have been the key recent M&A trends or developments in your jurisdiction?
The only major development of 2015 was the increasing number of companies going public to raise funds.
1.2 What is your outlook for public M&A in your jurisdiction over the next 12 months?
Public M&A is expected to continue growing, in view of the increasing number of companies going public. In addition, there is no tax on capital gains when selling public shares. However, the lack of visibility on Egypt's monetary policies and restrictions on sourcing and repatriating foreign currency will continue to have a chilling effect on investments in Egypt.
Section 2: REGULATORY FRAMEWORK
2.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
Public M&A activity in Egypt is principally governed by Capital Market Law 95 of 1992 (Capital Market Law), its Executive Regulation 139 of 1993, and Companies Law 159 of 1981 (Companies Law).
2.2 How, by whom, and by what measures, are takeover regulations (or equivalent) enforced?
The Egyptian Financial Supervisory Authority (EFSA) enforces chapter 12 of the Capital Market Law's Executive Regulations on Tender Offers (Chapter 12). Chapter 12 sets out, disclosure requirements and other regulatory measures and thresholds. Failure to comply is punishable by monetary fines and imprisonment.
Section 3: STRUCTURAL CONSIDERATIONS
3.1 What are the basic structures for friendly and hostile acquisitions?
Acquisitions can be carried out through open market transactions or tender offers.
If the bidder intends to acquire up to one-third of the shares or voting rights of a public or listed company (the target), it may do so by either: (i) acquiring the shares through open market transactions by placing a buy order through a licensed broker; or (ii) launching a tender offer to acquire the percentage of shares intended to be acquired.
If the bidder intends to acquire one-third or more of a target's shares or voting rights, it must launch a mandatory tender offer whereby it offers to acquire up to 100% of the target's shares.
3.2 What determines the choice of structure, including in the case of a cross-border deal?
This depends on the threshold of ownership to be acquired in the target, as well as other tax, regulatory and deal-specific considerations.
3.3 How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
This depends on whether the acquisition is effected by way of open market transactions or tender offers.
If the acquisition is effected through open market transactions, the timeline would primarily depend on the trading activity of the concerned share (the availability of shares offered for sale). With respect to actively traded shares, the acquisition should be effected relatively quickly .
If the acquisition is effected by way of a tender offer, the offer must be valid for at least 10 Egyptian Exchange (EGX) trading days (EGX days) and no more than 30 EGX days. Competing offers may be made during the original offer's validity period, provided that a competing offer may not be made during the last five EGX days of the original offer's validity period. If the EFSA accepts a competing offer, it may extend the validity period of the original offer.
3.4 Are there restrictions on the price offered or its form (cash or shares)?
Generally, the consideration for shares offered to be acquired by way of a tender offer may be cash, shares in another company or a hybrid of both. From a practical perspective, if the acquisition is made by way of open market transactions, the consideration must be cash.
If the price of a tender offer is in the form of a share swap or a hybrid offer, the EFSA may require the target to appoint an independent financial adviser to assess the offer. In the case of mandatory tender offers, the target's shareholders must have the option of receiving cash instead of shares.
In addition, the price of the offer must not be less than the highest price paid by the bidder (or any of its related parties) in a previous tender offer made during the 12 months preceding the relevant offer.
In certain circumstances, shareholders holding at least three percent of the target's shares may request the shareholder holding (directly or indirectly) 90% or more of the shares to submit a tender offer to acquire their shares. In these circumstances, the price of the offer must be made in cash and must not be less than the highest price paid by the majority shareholder in a previous tender offer made during the 12 months preceding the relevant offer.
All competing offers must be in cash.
3.5 What level of acceptance/ownership and other conditions determine whether the acquisition proceeds and can satisfactorily squeeze out or otherwise eliminate minority shareholders?
A vote of the target's shareholders is not required for the acquisition to proceed.
Egyptian law does not recognise the squeeze-out concept. As such, no shareholder may be under a statutory obligation to sell its shares.
3.6 Do minority shareholders enjoy protections against the payment of control premiums, other preferential pricing for selected shareholders, and partial acquisitions, for example by mandatory offer requirements, ownership disclosure obligations and a best price/all holders rule?
As a general principle, parties to the tender offer (the bidder, the target, the independent and related advisers and their respective related parties) must deal with all the target's shareholders on an equal basis.
If the bidder intends to acquire one-third or more of a target's shares or voting rights, it must launch a mandatory tender offer whereby it must offer to acquire up to 100% of the target's shares. The price offered may not fall below the highest price paid by the bidder (or any of its related parties) in a previous tender offer made during the 12 months preceding the relevant offer.
Reaching certain ownership thresholds triggers disclosure obligations under Chapter 12 and the EGX listing rules.
3.7 To what extent can buyers make conditional offers, for example subject to financing, absence of material adverse changes or truth of representations? Are bank guarantees or certain funding of the purchase price required?
A tender offer may only be conditional on: (i) 75% of the target's shares being tendered by the shareholders, if the bidder intends to merge the target after completion of the tender offer; (ii) 51% of the target's shares being tendered by the shareholders; or (iii) if the price offered is shares in another company to be issued by way of increasing the share capital of such other company, the offer must be conditional on the approval of such company to issue the capital increase shares.
The tender offer may not be subject to any other conditions.
The bidder must submit a statement issued by a bank licensed by the Central Bank of Egypt confirming the availability of cash resources sufficient for payment of the consideration for the shares subject of the tender offer.
Section 4: TAX CONSIDERATIONS
4.1 What are the basic tax considerations and trade-offs?
The Income Tax Law has been amended so that capital gains achieved in respect of divesting listed shares are now subject to tax. However, this amendment will not come into force until May 17 2017.
4.2 Are there special considerations in cross-border deals?
One of the special tax considerations in cross-border deals is the jurisdiction in which the sellers are incorporated and whether the country is a party to a double taxation treaty with Egypt.
Section 5: ANTI-TAKEOVER DEFENCES
5.1 What are the most important forms of anti-takeover defences and are there any restrictions on their use?
Anti-takeover defences may take the form of the refusal of the target's board to cooperate with the bidder with respect to providing due diligence information.
In general, the target's board must pursue the best interests of the target and refrain from any action that may restrict the shareholders from determining the value of the target's shares on a proper basis. In addition, the parties relevant to the tender offer must abide by the principles of competition, freedom to submit offers and equality between the target's shareholders.
In particular, the Capital Market Law prohibits the target's board and managers from causing any material adverse change to the target from the date of the EFSA's approval of the offer until the announcement of the offer's results.
5.2 How do targets use anti-takeover defences?
The target's board may advise the shareholders against accepting the bidder's offer.
5.3 Is a target required to provide due diligence information to a potential bidder?
There is no statutory provision requiring a target to provide due diligence information to a potential bidder.
5.4 How do bidders overcome anti-takeover defences?
A bidder (whether individually or along with other shareholders of the target) may submit a petition to the EFSA against any anti-takeover defence that it believes is illegal.
5.5 Are there many examples of successful hostile acquisitions?
No; friendly acquisitions are more common.
Section 6: DEAL PROTECTIONS
6.1 What are the main ways for a friendly bidder and target to protect a friendly deal from a hostile interloper?
See 5.1. From a practical perspective, however, the EFSA has accepted the concept of the bidder entering into lock-up agreements with existing shareholders of the target to protect the deal.
6.2 To what extent are deal protections prevented, for example by restrictions on impediments to competing bidders, break fees or lock-up agreements?
There are no explicit prohibitions on specific deal protections. However, the general principle in 6.1 applies.
Section 7: ANTITRUST/REGULATORY REVIEW
7.1 What are the antitrust notification thresholds in your jurisdiction?
The Egyptian Authority for the Protection of Competition and the Prohibition of Monopolistic Practices (ECA) requires a post-closing notification of any transaction that results in the acquisition of assets or shares, or the merger of entities if the annual turnover of the relevant parties to the transaction exceeds EGP100 million (approximately $12.7 million).
Moreover, the ECA does not have the power to approve, block or modify any terms or conditions of the transaction.
7.2 When will transactions falling below those thresholds be investigated?
Transactions falling below this threshold do not have to submit notification. The ECA may investigate these transactions if a complaint is submitted that there is a violation of Egyptian Competition Law 3 of 2005. In addition, the ECA may investigate these transactions with respect to anti-competitive agreements or practices.
7.3 Is an antitrust notification filing mandatory or voluntary?
Antitrust notification filing is mandatory with respect to transactions that meet the criteria in 7.1.
7.4 What are the deadlines for filing, and what are the penalties for not filing?
Notification must be made no later than 30 days after the transfer of shares. The penalty for not filing is a fine of no less than EGP20,000 and no more than EGP500,000.
7.5 How long are the antitrust review periods?
There is no antitrust review period.
7.6 At what level does your anti-trust authority have jurisdiction to review and impose penalties for failure to notify deals that do not have local competition effect?
There is no explicit statutory provision granting the ECA the authority to review deals that do not have local competition effect, so long as such deals are carried out outside Egypt.
7.7 What other regulatory or related obstacles do bidders face, including national security or protected industry review, foreign ownership restrictions, employment regulation and other governmental regulation?
If the acquisition is effected by way of a tender offer, national security clearance is a prerequisite for the EFSA's approval for launching the tender offer.
In addition, there are foreign ownership restrictions in exceptional cases. Acquisition of shares in companies in certain industries requires the written approval of the relevant regulator.
Section 8: ANTI-CORRUPTION REGIMES
8.1 What is the applicable anti-corruption legislation in your jurisdiction?
There is no standalone anti-corruption legislation in Egypt. The Egyptian Penal Code 58 of 1937 is the applicable law.
8.2 What are the potential sanctions and how stringently have they been enforced?
The potential sanction is generally imprisonment. This has been enforced relatively stringently with respect to discovered cases.
Section 9: OTHER MATTERS
9.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
Lack of clear vision on macroeconomic and monetary policies and restrictions on sourcing and repatriating foreign currency. It should be noted however that the Central Bank of Egypt has devised a mechanism to facilitate the repatriation of the proceeds of selling Egyptian publicly traded securities by foreigners.
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Omar S Bassiouny
About the author
Muhammad Nassef is of counsel at Matouk Bassiouny and a member of the corporate and M&A team. He typically represents major private equity firms, multinationals and Egyptian companies on M&A. He also handles other corporate transactions such as joint ventures and corporate restructurings. Recently he advised Carlyle MENA on its proposed acquisition of a major Egyptian public company and Bristol Myers Squibb when it divested its Egyptian business to GlaxoSmithKline.
He has an LLM in corporate and commercial law from the University of Virginia and a diploma in investment and international trade law from Cairo University. He speaks Arabic and English.