Any sale or purchase of shares of an Egyptian company is a turning point for a business or an investment portfolio. Share Purchase Agreement (SPA) is a vital element that contains the details of the deal, the allocation of risk for the parties, and the outcome of the transaction. For foreign buyers looking for a smooth completion of their share purchase in Egypt, proper awareness of SPA-related regulations is crucial to avoiding a failed transaction and possible disputes arising later on.
In this article, we offer an overview of share purchase agreements in Egypt, including the basic features of the deal and the SPA structure, its clauses, the regulatory steps involved, and possible complications in negotiations between foreign purchasers and Egyptian sellers.
What Is a Share Purchase Agreement?
Share purchase agreement is a type of agreement that regulates the sale and purchase of the shares of a company. Contrary to asset purchase agreement, it means buying the company itself. Under Egyptian law, the share purchase agreement is a preferred method of transferring assets due to its simplicity and lower transaction costs in comparison to asset purchase agreement. An SPA allows the buyer to acquire all existing licences, contracts, staff, and tax history of the target company. As a result, the acquisition becomes easier in many respects as opposed to the asset purchase approach, especially for foreign purchasers.
Why Does Share Purchase Agreement Dominate as an Acquisition Tool?
According to Egyptian law, there are several methods of purchasing companies, including share purchase, asset purchase, merger, and statutory transformation. Of all the aforementioned methods, foreign investors favour the first one for a range of reasons.
Firstly, a share purchase agreement is quicker and simpler compared to other types of agreements since there are fewer regulatory hurdles that need to be tackled.
Secondly, unlike asset purchase, an SPA does not disrupt the functioning of the target enterprise, thus, the purchaser can get a company that is ready to work immediately after the deal closing.
Thirdly, the merger procedure involves more complicated internal procedures, and statutory transformation involves additional risks of third party objections.
Lastly, in regulated sectors, the competent authority may require pre-purchase approval of the new shareholder regardless of the deal structure.
Nevertheless, sector-specific foreign ownership restrictions may still limit or prohibit the use of SPAs in certain industries. For instance, banks, insurance companies, telecommunication providers, energy enterprises, and companies engaged in certain media activities may have limitations or bans on foreign shareholdings. Other than that, the share purchase agreement is always the best option for foreign investors in Egypt.
Main Components of Share Purchase Agreements in Egypt
Although the overall structure and elements of SPAs are quite similar across countries, there may be certain specifics when it comes to Egypt. To understand the core structure and most important elements of share purchase agreements in Egypt, buyers should know what each element should include.
1. Parties and Recitals
Here you have to make sure that the identification of your counterparty (individual, entity, or a combination of both) is correct, and the ability of the seller to sell his/her/their shares is clear. In addition, it is necessary to mention the seller’s capacity to make such a sale (e.g., in case of selling the shares in a limited liability company).
According to Egyptian law, for LLCs, the other shareholders’ prior consent for selling the shares is required unless otherwise stated in the articles of association of the company. Therefore, when dealing with an SPA related to a limited liability company, the question whether the other owners of the company participate in this transaction should be clarified.
2. Sale and Purchase of Shares
Under SPA, you have to specify what kind of shares are being purchased and how many there are. According to the law, bearership of shares in Egypt is forbidden. Hence, when referring to a number of shares and/or their nominal value, you should base it on the official share register and the articles of association.
It is also useful to clarify in the SPA whether the target company operates in a sector where there are foreign ownership restrictions.
3. Price and Payment
When it comes to setting the price, Egyptian law does not impose any statutory limit on that. Still, certain factors need to be considered. First of all, payments from abroad must comply with the foreign currency regulations of the Central Bank of Egypt. In addition, the closing condition must always be linked to the timely transfer of the purchase price.
Earn-out agreements are commonly seen in Egyptian transactions, although they may become complicated when enforced in case of a dispute. When the SPA includes an earn-out, it is crucial to clarify the metrics and the accounting standard for determining the earn-out payments. Otherwise, you may find yourself in a position of disputing earn-out calculation formula and amounts.
When the transaction includes a working capital adjustment in Egypt, the SPA should address the mechanism in detail. Unlike many common law jurisdictions, Egyptian companies follow Egyptian Accounting Standards when filing financial reports. To avoid disputes over the price adjustment, the SPA should specify the relevant financial metrics and define the applicable accounting standard in advance.
4. Pre-Closing Conditions
This point of the SPA normally takes the largest part of negotiations. Typically, conditions precedent to closing may refer to either regulatory issues or the matters related to the agreement itself. Regulatory conditions include the following:
- GAFI filing and approval
- CBE approval if the target company is a financial institution
- Approval of ECA (in case the transaction satisfies thresholds)
- Approvals from various sectorial ministries depending on the activity
The problem with such conditions is that obtaining them may take longer than expected. It is always better to foresee this possibility, so you should build your deadlines wisely.
Conditions to the SPA itself can cover, among others, the following points:
- The accuracy of the representations and warranties made on closing
- The compliance with pre-closing obligations of the seller
- The absence of material adverse change after due diligence
- The delivery of required documents
5. Representations and Warranties
Representations and warranties in SPA have a double purpose – disclosing relevant information and creating a basis for possible claims from the seller if he/she/they turn out to be misleading. In an Egyptian context, it is necessary to pay special attention to those aspects of representations and warranties that might surprise you at the end of the day.
Typically, standard representations made by an Egyptian seller under SPA include the following:
- Existence and good standing of the company
- Accuracy of financial statements
- Ownership of the shares free from encumbrances
- Compliance with applicable Egyptian laws
- Accurate calculation of corporate income tax, VAT, and stamp duties
- Payment of all taxes and levies due in accordance with the law
- Compliance with labor laws, including social insurance contributions
- Litigation or regulatory proceedings
- Ownership of intellectual property
- Accuracy of material contracts and agreements
The first element that tends to cause misunderstandings among buyers is related to taxation. The thing is that in Egypt, the tax authority conducts regular audits that can reveal some tax arrears for the last several years. Thus, it makes sense for a foreign buyer to ask for precise representations on the matter. Furthermore, it is advisable to negotiate a tax indemnity provision in SPA that would not be capped in accordance with general warranty limitations.
Another issue to pay attention to when it comes to representation and warranties in Egypt is related to social insurance. Often, Egyptian companies use informal approaches to compensations for their employees, which results in high risks of non-compliance with labour regulations.
6. Seller’s Disclosure Letter
Since Egyptian sellers often have no prior experience in preparing a disclosure letter for SPA, they are likely to be unaware of its importance. Nevertheless, this document is a crucial part of risk management and must be taken into account.
Foreign buyers should avoid accepting vague disclosure letters from Egyptian sellers. The seller’s representations must be qualified in such a manner to allow the buyer to see whether there are any problems related to representations.
7. Pre-Closing Obligations
In the period between signing SPA and closing, the seller must continue operating the company in the ordinary course of business and avoid any actions that require the buyer’s consent.
Those may include:
- Dividends distribution
- Making material contracts
- Changing employment relations
- Disposing of certain assets
- Amending the articles of association of the company
A well-drafted SPA should define these obligations carefully to avoid excessive restrictions and possible conflicts.
8. Limitation of Liability
The problem with limitation of liability in SPAs of Egyptian companies is the fact that Egyptian courts use the Civil Code general principles to establish liability if the parties do not specify otherwise. That is why, it is important to pay attention to the following parameters:
Basket – here you need to set the threshold for claims below which a claim cannot be made, and the aggregate threshold, above which the indemnification will be provided
Cap – it should be the maximum liability of the seller for breach of warranty obligation expressed in percentage of the purchase price
Time limits – how much time you have to claim against the seller for warranty breaches
Carve out – caps and baskets should not apply to fraudulent misrepresentation, and this must be explicit in the SPA
9. Governing Law and Dispute Resolution
It is obvious that the most natural choice of the governing law for Egyptian SPAs is the Egyptian law. However, there are no legal barriers to agreeing on foreign law for the transaction. You should choose your own dispute resolution method, and the ICC or LCIA arbitration in Cairo can be a good option for cross-border deals.
In case your transaction involves an Egyptian company and you prefer a foreign jurisdiction and/or international arbitration, you should consult your Egyptian lawyers since there may be some pitfalls associated with this choice.
10. Closing Mechanics and Post-Closing Obligations
The closing is typically conditional upon delivering the purchase price, signed share transfer forms, the updated share register, and other required documents. In the case of LLCs, it should be registered with the commercial registry.
Post-closing obligations may include earn-out payments and other terms related to the transfer of shares. Non-compete clauses are enforceable under Egyptian law, provided that the terms and conditions are reasonable enough.
Recurrent Problems That Often Occur for Foreign Buyers
Even with a solid SPA in hand, foreign investors usually face the same problems in deals. Here are some of those that need attention before proceeding.
Diligence findings appear more burdensome in Egypt.
Sometimes, minor defects found during due diligence become more dangerous in Egypt because of local circumstances. Ineffective HR processes, related-party transactions without documentation, and lack of licences in Egypt-based enterprises may lead to additional risks of hidden liabilities for the buyer.
Seller cooperation becomes much more important than the price itself.
Often, family-owned Egyptian companies include sellers that have strong ties to the business. That is why getting post-closing cooperation from them in exchange for earn-out payments or transitioning service becomes much more beneficial than bargaining for a slightly lower price.
Currency and repatriation.
If the buyer uses Egyptian banks to transfer money for a transaction, he/she should pay special attention to that because the Central Bank of Egypt’s regulation regarding foreign currencies may differ from your expectations.
Language and translation.
Most documents filed with Egyptian authorities are to have Arabic text. Therefore, you should carefully translate SPA and other documents and make sure that the two texts coincide. In case of discrepancies, authorities will rely on the Arabic version only.
Conclusion
Share purchase agreement is the most efficient and convenient way to buy an Egyptian company. Nevertheless, it may be quite challenging from the regulatory point of view. Paying attention to the points mentioned above will help you close the deal without further complications.
For professional advice, please contact our office at info@youssrysaleh.com
