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Key Amendments to the EGYPTIAN Companies LAw No. 159 of 1981


New regulation have been enacted in regards of the management of the companies in Egypt as part of the reform and the speedy development of the business laws, accordingly the Egyptian government introduced a number of amendments to the Companies Law.


On 16 January 2018, Law No. 4/2018 was published in the Official Gazette amending important provisions (the “Amendment”) of the Egyptian Companies Law no. 159/1981 (the “Companies Law”). Those amendments were followed by the issuance of the Executive Regulation (the “ER”) of the said Amendments by the Ministry of Investment and International Cooperation.


The issuance of Companies Law and Executive Regulation Amendments (collectively the "Amendments") was crucial to comply with the dynamic changes to Egypt’s economic and investment environment as well as to help bringing the economy to its full potential.


The following is a summary of the key amendments introduced:


1) Sole Person Company:

One of the significant changes to the companies law and for the first time in Egypt the Amendments introduce single person companies that may be owned solely by either a natural or a juristic person (the “Sole Person Company”).

The companies in Egypt were based on the partnership of at least two partners. Single person companies are limited liabilities companies, the liability of the sole shareholder is only limited to the capital of the company except for the following cases where the founder shall be held jointly liable with the company and the said liability shall be extended to money and/or assets owned by the founder of the Sole Person Company. This shall take place in case of:

1. Fraudulent Liquidation of the Sole Person Company

2. Ceasing the business activities of the company in bad faith, before the end of its term or before achieving the purpose thereof,

3. The failure to separate between the founder’s financials and the financials of the company.

4. The founder enters into business transactions before the incorporation of the company and that are not necessary for the purpose of the said incorporation.



Restrictions

The Sole Person Company is not allowed to:

1- Incorporate other Sole Person Companies.

2- Undertake any business activities related to insurance, banking, savings, receiving funds and investment management.

3- Undergo public subscription, neither at the company incorporation nor during capital increase.

4- Split the capital of the company into tradable shares.

5- Borrow through issuing securities.

Incorporation and Capital of the Sole Person Company

- The Amendments require the capital of the Sole Person Company, at the time of the company’s establishment, shall be paid in full.

- The ER stated that the minimum capital required for the establishment of the Sole Person Company shall be EGP 50,000.

Management of the Sole Person Company

1) The founder of the Sole Person Company manages and operates all corporate business related to the company.

2) The founder of the Sole Person Company is capable of concluding agreement/s between himself -as an individual- and between the company. Any concluded agreement shall never infringe the financial separation between the founder and the company.

3) The Amendments allow the concept of piercing the corporate veil for certain types of companies. This shall be applied in JSCs or Limited Liability Companies (“LLC”) in case of the number of founders becomes less than the minimum number required, thus one of two scenarios apply, either the company increases the number of shareholders to meet the number of shareholders required in order to legitimize its legal status, or the said company transforms into a Sole Person Company in the event that the minimum number cannot be met.

Compulsory Liquidation of the Sole Person Company

The liquidation of the Sole Person Company shall take place by virtue of law in case of:

- Its losses exceed 50% of the company’s capital.

- The incapacity of the founder.

- Liquidation of the founder of the company in case it’s a juristic person.

- Death of the founder.

The French one-person limited liability company which has the form of Entreprise Unipersonelle à Responsibilité Limitée (“EURL”), has only one shareholder. (Art. L. 223-1, L. 223-4 ff., L. 223-31, D. 223-2 and Annex 2-1)[1].

The EURL is a limited liability company but it is owned by just one person “the sole shareholder”. According to the French Commercial Code “Article L223-1

Modified by LAW n ° 2008-776 of August 4, 2008 - art. 56 that states:

“The limited liability company is set up by one or more people who only bear losses up to the amount of their contributions.”

Same as the Egyptian law, the founder’s liability for debts is limited to the value of the company’s capital in the investment. As mentioned in both laws, the capital can be entered by way of cash or assets.[2]


According to the Amendments, the Egyptian legislator found in the Sole Person Company a solution to the one person entity for doing business. However, and unlike the French model the Egyptian Sole Person Company is non-expandable due to the inability of adding more shareholders to this form of company. In order to keep the company expanding the shareholder shall resort to ways rather than increasing the number of shareholders, i.e. bank loans which is not always an applicable or practical solution.

The French model is more flexible, whereby going through a simple legal procedure which is adding another shareholder to the EURL; the company still has the same LLC legal form and has the ability to expand.

2) Share Dematerialization

As an incorporation requirement, any new Joint Stock Company shall complete the dematerialization and deposit of their shares with Misr for Central Clearing, Depository and Registry (“MCDR”). That was not strictly applied by the GAFI, however, the Amendments are more firm applying this requirement which is a necessity to allow an interim certificate of deposit, evidencing such dematerialization, to be issued before the incorporation process in finalized.


Virtual General Assembly meetings

Any new company, upon dematerializing its shares, may use any electronic method in discussing and voting by the shareholders on the decisions of the General Assembly meetings.

According, the physical attendance is no longer required for voting and discussing the company system. This approach of the GAFI is indeed a welcome development to foreign investors in particular to run their business in Egypt.


3) More Minority Protections and More Power to GAFI

Minority protection:

The Amendments introduce minority protection by means of granting GAFI the right to suspend any resolution issued by the General Assembly, upon the request of shareholders owning at least 5% of the company’s capital, which might be taken in abuse of their rights or in favor of certain category of shareholders or benefitting solely the board of directors or others. In that case a lawsuit shall be filed by the shareholder within 30 days of the suspension or else the said suspension shall be expired. This administrative suspension was not available before the Amendments as shareholders could only resort to the courts to suspend any General Assembly resolution. In addition, shareholders having a least 10% of the company’s share have the right to obtain information and view contracts and have access to documents of the companies transaction concluded by the company, or to request GAFI to allow them access to such documents and information in case of non-compliance by the company upon which its decision shall be binding to the company.

Furthermore, the Amendments allow the Articles of Association of a JSC to provide for a minimum representation of the company’s capital in the membership of the board of directors given that each 10% of the capital gets only one seat in the board.

Also the Amendments granted GAFI active measures to be taken against corporate governance violations, fraudulent corporate actions and any majority abuse. Whilst these rules were implemented in practice by GAFI providing for formal regulation gives more assurance as it protects against any change in GAFI’s internal practice.

GAFI’s more power

1- The authority to object to capital increase


The Amendments grant GAFI the power to object to a capital increase even after it has been finalized and annotated in the Commercial Register. GAFI’s authority in is limited to specific cases such as fraud, prejudicing the rights of shareholders or third parties, violation of Egyptian Accounting Standards or substantial violations of the law and capital increase procedures. GAFI’s objection will be stated in the Commercial Register and the company may object back within 15 days otherwise the capital increase will be removed from the commercial register.


2- The authority to take the procedures of decreasing the capital of the company

Which shall take place in case of non-compliance of the company with the rules of the retention and disposal of treasury shares within 30 days from warning the company of the said non-compliance.

3- The Authority to order administrative estoppel of general assembly resolutions

Which shall take place upon minority request; the shareholders who own 5% of the company’s shares as mentioned above.

Furthermore, the New Amendments set out the procedure upon which reconciliation on violations and crimes shall take place under the Companies Law.

In exchange for reconciliation, an amount is specified which shall not be less than double the minimum fine prescribed for the violation/crime in question.

The said authority of reconciliation is granted to the Minister of Investment and shall result in terminating all criminal procedures and estoppel of criminal penalty execution even if reconciliation takes place after a final verdict is issued.

  • TREASURY SHARES

A new restriction on the issuance of treasury shares was added by the Amendments whereby the listed company may not own more than 10% of its capital. Before the Amendments this restriction was applied to the treasury shares of the unlisted companies, which should not exceed 10% of its issued capital as well. Now and by adding this amendment, the restriction is applied to both the unlisted and listed companies.


The Amendments have retained the original one-year limit of acquisition within which the company shall dispose of the treasury shares to third party otherwise the company shall reduce its capital by the nominal value of the shares.

However, the Amendments added a restriction whereby the shares cannot be disposals to a “subsidiary” or a “related party” to the Company that are effectively under the control of the company.


The Executive Regulations (“ER”) defined “Subsidiaries” as “those companies in which the company holds more than 50% of their capital or voting rights”. In addition, the “related parties” are defined by the ER as “(i) parties that are subject to the effective control of the company, or (ii) parties that have an agreement with the company when voting at the meetings of the General Assembly of the company or its board of directors or (iii) any party in which the company owns a percentage of the shares or voting rights that give the Company the ability to influence its decisions.


  • PREFERRED SHARES

Before the Amendments, a company could not issue preferred shares unless the articles of association upon incorporation stipulated the terms and conditions of such preferred shares which made the issuance of preferred shares relatively limited.


The Amendments of the companies’ law and the executive regulations stated that is permissible to issue preferred shares or raise capital with preferred shares during the company’s life time. This shall take place by virtue of the approval of the Extraordinary General Assembly by a three fourths majority of the company’s shares, based on the proposal of the board of directors. . Preferences are granted in terms of voting, dividends or liquidation proceeds. However, the Amendments set forth that it is not permissible for voting and liquidation proceeds preferences to be combined.

  • REGULATING SHAREHOLDERS’ AGREEMENTS (THE “SHAS’”)

Shareholders, at the time of establishing the company or later, enter into an agreement setting the relationship between the parties. The concept of having Shareholders' Agreement ("SHA") for any company other than the Articles of Incorporation was not applicable under the Companies Law and was not binding vis-à-vis any shareholder who is not a party of the said SHA and/or third parties. At the meantime, and under the Amendments it is finally possible to have a binding shareholders’ agreements before other parties and shareholders provided that a number of conditions are satisfied. This shall take place after the approval of the Extraordinary General Assembly by a majority vote of 75% of the company’s capital.



  • Limited Liability Companies Management:

Limited Liability Companies (“LLC”) are not restricted by the nationality of the manager. LLC is required by the Companies Law to be managed by at least one manger. For the first time in Egypt and since the issuance of the Companies Law and its Executive Regulation, the Amendment stated that LLC is no longer required to have at least one Egyptian manager and it is possible to be managed by one manager of any nationality. Highlighting this amendment is crucial for all multinational companies which do desire to overcome the restriction of nationality of the managers within their subsidiaries in Egypt.

· Piercing the Corporate Veil:

The Amendments recognize the concept of piercing the corporate veil for corporates' shareholders. This concept is applied in case of the number of shareholders becomes less than the minimum in both forms of companies, three shareholders in JSCs or two shareholders in Limited Liability Companies ("LLC"). In that case the said concept applies to the remaining shareholders. The said JSCs and/or LLCs shall either legitimize their legal status by increasing the number of shareholders to reach the minimum required number in the period stated by law, or shall change the form of the company to be a Sole Person Company within the same period of time.


· LOSS OF CAPITAL:

According to the Amendments and in case of losing more than 50% of the company's issued capital it is no longer required to obtain an approval from a company's Extraordinary General Shareholders Meeting in order for the said company to be in a position to continue its business.

Before the Amendments, that approval was an obstacle in the way corporates do business in Egypt, especially for companies that do have an issued capital that is much less than their profit. The Amendments stated that the approval mentioned to be required only in case of losing more than 50% of the shareholders rights and but not 50% of the issued capital.

  • ELECTRONIC VOTING:

Upon number of requirements, the Amendments stipulate that the shareholders of the companies that are registered under the Central Securities Depository, may vote remotely/electronically on the resolutions of the Extraordinary and Ordinary General Assembly as well as voting in the election of the board members by granting each shareholder a number of votes equal to the number of shares he holds. A shareholder who has voted remotely shall have the right to attend the General Assembly meetings.

This Amendment is extremely useful for multinational and large corporates doing business in Egypt.

Conclusion

The Egyptian market has witnessed a noticeable development in the laws, rules and regulations of doing business. The amendments to rules and regulations governing the protection of minority shareholders in the companies, providing more power to GAFI and reorganizing the companies’ inner systems are remarkable. The article highlighted the rules and regulations related to the General Assembly attendance, the electronic voting system in addition to the minorities’ rights to call for the General Assembly and their right to suspend the General Assembly resolutions by virtue of law. Another issue tackled was the right of the shareholders to have access to the documents, contracts and transactions of the company. All what was discussed in this article is a leading guide to any foreign investor wishing to do business in Egypt and is seeking assistance.

[1] https://www.eurostartentreprises.com/business-advice/item/152-what-s-the-difference-between-a-sarl-sas-sa-eurl-micro-entreprises#.YEoR3G8za1s [2] https://www.legifrance.gouv.fr/codes/section_lc/LEGITEXT000005634379/LEGISCTA000006133176/#LEGISCTA000006133176

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