Corporate re-structuring and M&A occupy a significant share of the corporate finance world. M&A transactions resulting in a formation of a larger entity. Corporate finance deals with the other side of the coin as well and does the opposite by minimizing organizations through spinoffs or tracking stocks. Surely, M&A attracts vast attention and does not pass unnoticed by the market, however, it is important to understand what it connotes to the investor when the matter is taking place in Egypt.
Governing Laws and Regulations
Public merger and acquisition transactions in Egypt are primarily governed by Capital Market Law No. 95 of the year 1992 and its Executive Regulation No. 139 of the year 1993, and the Companies Law No. 159 of the year 1981. The Egyptian Financial Supervisory Authority (EFSA) is the responsible authority responsible for enforcement of Ch. 12 of the Law No. 95 of the year 1992 Executive Regulation. Chapter 12 stipulates procedures associated with tender offering, disclosure requirements, regulatory measures, penalties which range from monetary to detention.
The structure of both friendly and hostile acquisitions is chosen based on the threshold of the ownership offered for acquisition in addition to other transaction specific considerations such as tax applicable and regulatory impositions.
Acquisitions take place through open market transactions or tender offers. In case the bidder intends to acquire less than 1/3 of the shares or voting rights of a listed company, it can be done by either:
- Acquisition of shares via open market transactions by placing ‘buy order’ through an authorized broker; or
- Announcement of a tender offer for acquisition of the percentage of shares
In case the bidder wishes to acquire 1/3 or more of the target company, then a mandatory tender shall be launched whereby it is offered to acquire up to 100% of the shares.
When shares are offered through a tender offer for acquisition, the consideration may be cash and/or shares in another company. Practically, if the acquisition is carried out via open market transactions, the consideration must be cash. Now, in case the price of the offer is in a form of a share swap, it might be requested by the EFSA the appointment of an independent financial advisor by the target in order to evaluate the offer. In case of mandatory tender offers, the shareholders of the target must be eligible to select cash instead of shares.
The price of the offer cannot be less than the maximum price paid by the bidder and/or related parties in a tender offer made during the preceding twelve months of the current offer.
In instances where shareholders holding no less than 3% of the target’s shares request the shareholder(s) holding 90% or more of the shares to submit the tender offer for acquisition of the minority shares, the price of the offer must be cash and not less than the maximum price paid by the majority shareholder on the preceding tender offer within the past twelve months.
The speed of transaction primarily depends on the way of its execution: open market transactions vs. tender offers:
For open market transactions: the timeline primarily depends on the trading activity of the share at stake. i.e. availability of shares, trade activity associated with the share, etc. In case of actively traded shares, the acquisition is completed in a relatively short timeframe.
In case acquisition is performed through a tender offer, the following applies:
- The offer must be valid for at least ten EGX trading days and not more than thirty EGX trading days
- Competing offers may be placed within the validity period of the original offer, but it cannot be made during the last five EGX trading days of the validity period of the original offer
- In case the competing offer is being accepted by the EFSA, the validity period of the original offer may be extended.
The ‘Minority Squeeze-out’ Concept: Is it Applicable in Egypt?
Pertinent to Egyptian Law, the shareholders of the target are not required to vote in order for the acquisition transaction to proceed. The concept of the minority squeeze-out is not recognized, and hence, there is no statutory provision obliging shareholders to sell their shares.
On the general note, all the concerned parties of the tender offer must deal with target’s shareholders on equal basis.
A tender offer can be conditional only on the following:
- Seventy-five percent of the shares of the target is being tendered by the shareholders, in case the bidder intends to merge the target after the tender offer is completed
- Fifty-one percent of the shares of the target is being tendered by the shareholders; or
- In case the price offered constitutes shares in another company to be issued by means of increasing the share capital of the said company, the offer then must be conditional on the approval of the said company of issuance of the capital increase shares;
Otherwise, the tender offer may not be subject to other conditions. Important note, is that part of the required documents is the statement submitted by the bidder from the licensed by the CBE bank evidencing availability of cash sufficient for payment of the consideration.
After amendment of the Income Tax Law, capital gains resulting from divesting listed shares are subject to taxation. One of the important considerations related to tax and international deals is the jurisdiction of sellers’ incorporation and its double taxation treaties, whether it is a party to double taxation treaty with Egypt or not.
Protection of the Deal
Parties participants of the tender offer are obliged to deal with the target’s shareholders on equal basis, and be compliant with the core principles of competition and freedom of submission of offers and bidding procedures. Practically, EFSA recognizes the concept of ‘lockup agreement’ with existing shareholders of the target with the objective of protection of the deal; and it does not impose any restrictions on particular protections of the deal.
The Egyptian Authority for the Protection of Competition and the Prohibition of Monopolistic Practices (ECA) requires:
- A notification after the closure of the transaction resulting in share/asset acquisition
- A notification after the merger of entities with annual turnover exceeding EGP 100 million.
- ECA is not empowered to: approve, prevent, modify any terms/conditions of the transaction.
The notification shall be submitted within 30 days from the date of effect of the share transfer. Failure to file such a notification incurs a fine of no less than EGP 20,000 up to EGP 500,000.
National Security Clearance is a pre-requisite for a tender offer, which is necessary for obtainment of approval from EFSA prior to launch of the tender offer. Moreover, in some cases foreign ownership is restricted. In other words, acquisition of companies’ shares operating in certain industries is possible only upon obtainment of approval of the competent regulatory authority.
The matter of corruption is covered by the Egyptian Penal Code 58 of 1937. The generally applicable sanction is imprisonment which has been enforced in numerous revealed cases.
Recently, the EGX Listing Rules and Executive Regulations have been amended, and given the fact of the recent changes in the country, it appears that the legal framework is and will be undergoing changes and developments.