An exercise in streamlining
Soliman Hashish & Partners examines 10 key impacts on Egyptian corporates from the recently amended Egyptian Companies Law. The 2018 amendments are arguably the most important since the Law’s issuance in 1981
As a part of the process of developing Egypt’s business laws, in 2018 the Egyptian Companies Law No. 159 of 1981 was amended by Law No. 4 of 2018 (the Law Amendments). The Companies Law is the most fundamental law governing corporates in the country. The Amendments are considered the most important amendments made to the Companies Law since its issuance in 1981.
Based on the Law Amendments, the Executive Regulation of the Companies Law issued by virtue of the Ministerial Decree No. 96 of 1982 was also amended several times by Ministerial Decrees Nos. 16 of 2018, 256 of 2018, 32 of 2019 and 144 of 2019 (collectively the Executive Regulations Amendments).
The Law Amendments and the Executive Regulations Amendments (together, the Amendments) will have a large number of consequences for how corporates can operate in Egypt, including the following 10 key summarised impacts.
Name of Joint stock companies
A joint stock company (JSC) is one of the four forms of company that can be used for doing business in Egypt. This type of company resembles a US corporation or a French société anonyme, and it can either be a publicly listed or closed company.
For the first time in Egypt, by virtue of the Amendments, JSCs are now allowed to have a name that includes the name(s) or surname(s) of their founder(s), noting that a JSC’s name is required in all cases be diverted from its business activities. This possibility was restricted for almost 37 years until the issuance of the latest Amendments.
The restriction prevented multinational corporates from having their ultimate founders named as direct founders in their subsidiaries. This is especially significant in light of the fact that there are many multinational companies whose names contain their founders’ names. Examples include: Armani; AS Watson; Aston Martin; Baker International (currently Baker Hughes); Barclays; and Calvin Klein. These companies all use the name(s) and surname(s) of their founders: Giorgio Armani; Alexander Skirving Watson; Lionel Martin; Reuben C Baker; James Barclay; and Calvin Klein, respectively.
Piercing the corporate veil
For the first time in Egypt, the Amendments now recognise the concept of ‘piercing the corporate veil’ for corporates’ shareholders. (This concept was already recognized for corporates’ directors in cases of certain violations, such as not including a corporate’s name, type, headquarters and/or issued capital in the corporate’s documents, including contracts and invoices.)
This concept is applied in certain scenarios, including in cases where the number of founders becomes less than three in a JSC or less than two in limited liability company (LLC). In such scenarios, the concept will apply to the remaining shareholders until the JSC and/or LLC (as the case may be) legitimises their legal status by increasing the number of shareholders to reach the minimum required number.
The concept of having preferred shares was already recognised under the original text of the Companies Law; however, it was not possible to issue preferred shares after the incorporation of a company if the company’s original articles of incorporation did not include this possibility. This restriction was finally lifted by the Amendments.
It is worth noting that preferred shares may grant shareholders preferences in voting, dividends or liquidation proceeds.
The concept of having a shareholders’ agreement (SHA) for a company other than its articles of incorporation was not recognised under the Companies Law and, therefore, entering into a SHA was not valid vis-à-vis such company, any shareholder who is not a party of the said SHA and/or third parties (including the said company’s creditors). However, it is now finally possible to have a SHA providing that a number of conditions shall be satisfied.
No company is allowed by virtue of the Amendments to re-acquire more than 10% of its own shares by any means and for any purpose other than decreasing its capital, implementing employee or manager incentives schemes or refusing a transfer of share ownership (if the company’s approval is required). Furthermore, in case of any share repurchase, a company is required to: (i) notify the General Authority for Free Zones and Investment (GAFI) about the repurchase no later than three business days starting from the transaction’s date; and (ii) dispose of the re-acquired shares, subject to specific conditions, no later than one year after the repurchase date (the disposal must not be made to any subsidiary or related- party and will be subject to specific criteria).
Loss of capital
The Amendments no longer require approval from a company’s extraordinary general shareholders meeting (EGSM) if it loses more than 50% of its issued capital in order for the company to be in a position to continue its business. This approval requirement was an obstacle to corporate business conduct in Egypt, especially for companies that have issued capital that far below their profits (for example, if Company A with an issued capital of $1,000 loses $501, then Company A was previously required to obtain approval from its EGSM even if it generated $1,000,000 net profits per annum).
The Amendments now stipulate that EGSM approval is only required when a company loses more than 50% of the shareholders rights (but not 50% of the issued capital).
Subject to a number of requirements, the Amendments allow shareholders of companies registered in the Central Securities Depository to electronically vote during general assembly meetings, noting that this possibility is still subject to the issuance of its regulations by GAFI, which will definitely be very useful for multinational and large corporates operating in Egypt.
The LLC is one of the four forms of company that may be used for doing business in Egypt. The LLC corresponds to the French société à responsabilité limitée (SARL) and is similar to a British private limited company or a US closed corporation.
A LLC is required by the Companies Law to be managed by at least one manger, and but not a board of at least three directors as in the case of a JSC.
For the first time in Egypt since the issuance of the Companies Law and its Executive Regulation, LLCs are no longer required under the Amendments to have at least one Egyptian manager and they can now be simply managed by at least one manager of any nationality. Lifting this requirement is very useful to all multinational companies that do not want nationality restrictions on the managers of their subsidiaries in Egypt.
One person company (OPC)
For the first time in Egypt, the Amendments introduce one person companies (OPC) that can be owned simply by either a natural or juristic person.
OPCs (as LLCs) are not allowed to incorporate OPCs, or carry out any business activities related to insurance, banking, savings, receiving funds and investment management.
The liability of the sole shareholder in an OPC is limited to the paid-in capital, except for in the following cases, where liability will be extended to any assets owned by the sole shareholder: i) if the shareholder liquidates or cease the business activities of such an OPC in a bad faith before the end of its term or achieving its purpose; ii) if the financial independence of the OPC is not separated from the financial independence of the shareholder; or iii) if the shareholder enters into contacts or transactions before the incorporation of the OPC which are not necessary for the OPC’s incorporation.
Spin-off and split-off
The Amendments, for the first time in Egypt, introduce both spin- offs – ‘horizontal spin-off’ – and split-offs – ‘vertical split-off’. Before the issuance of the Amendments, it was a common practice before GAFI that company split-offs could be implemented by way of a resolution from an EGSM as well as a split-off contract. However, the Amendments now include a number of requirements for the implementation of both horizontal spin-offs and vertical split-offs. These requirements were vital to regulate and protect the interests of shareholders during spin-offs and/or split-offs, as well as the creditors of the company that are subject of the spin-off and/or split-off.
Mohamed Hashish has over fifteen (15) years of experience in handling Corporate, M&A, Restructuring, Banking & Finance, Energy & Electricity, TMT, Construction and Public Procurement matters.
Hashish is a bilingual Arabic and English lawyer and he has been recognized by Who's Who Legal and IFLR 1000 as one of the “highly regarded” leading lawyers in Egypt for 2015, 2016, 2017, 2018 and 2019.
Throughout his practice in Egypt, Hashish advised over seven hundred (700) clients on his area of practice including, inter alia, starting up and operation of their business in Egypt.
Due to his active practice and achievements, Hashish was appointed as (i) a Vice-Chair responsible for Publications and Year-In-Review at the International Financial Products & Services Committee of the International Law Section at the American Bar Association (“ABA”) for the ABA terms starting from August 2016 to August 2020; (ii) a Board member of the United Nations Global Compact in Egypt; and (iii) a Beachhead Advisor for Egypt at the New Zealand Trade and Enterprise.