EFSA Amends Listing Rules
EFSA Amends Listing Rules
Background
The Capital Market Law No. 95 of 1992 provides in Article 16 that EFSA’s board shall issue the rules and conditions governing the listing a delisting of securities on ESE. That being said, decrees have been issued by the Capital Market Authority (EFSA’s predecessor) followed by decrees by EFSA in this respect. The most recent one was decree No. 11 of 2014 approved by EFSA’s board on January 22, 2014. At its meeting dated March 23, 2016, EFSA’s board approved the amendment of decree No. 11 of 2014 as set out in detail below. This amendment aims to improve certain provisions regarding governance rules of listed companies and to limit any harm to the market due to cross ownership of related parties.Amendments
The Decision provides for some amendments of the listing rules. It has amended the definition of “independent board member” and the title of Chapter Four and other provisions. The decree has also added a few provisions to the listing rules as follows:- The amendment of the definition of the term “independent board member”:
The Decision has amended the definition of the term “independent board member” set out in Article 4 of the listing rules to read as follows: An independent board member is “a non-executive board member who is not a shareholder of the company and is not related to the company, its parent company, any of its affiliates or its related parties and has not been connected to them by employment, contractual relationship or board membership during the three years preceding its appointment to the board. He shall also not be the spouse or second degree relative of any of the above persons.” It is worth noting that the Decree has introduced the phrase “who is not a shareholder of the company” which was not included in the article before the amendment.
- The amendment of Chapter Four:
The board of directors of EFSA has amended the titles of Chapter Four and it’s first paragraph to become “Governance, minority protection and financial statements” and “Governance and minority protection” respectively.
- Dividend distribution and entitlement thereto:
The Decision has introduced a new paragraph (c) to Article 33 (Declaring dividends) to provide that shareholders shall be entitled to dividends and bonus shares as soon as the general shareholders meeting approve the distribution. The Decree has further clarified that buyers of shares shall be entitled to such distribution in case the disposal of the shares occurs during the time frame between the general shareholders meeting resolution approving the distribution and the day preceding the date set for the payment.
- Publicity of disclosers:
The amended article further clarifies that small and medium companies must only make their disclosures on the trading screens of the exchange and its website for a period not less than three days. Such amendment aims to clarify the ambiguity of the provision before amendment which may have given the impression that disclosures on the trading screens and the exchange’s website were additional obligations on small and medium companies rather than an exclusive obligation.
- Audit committees:
The Decision amended Article 37 of the Listing Rules governing audit committees and their constitution. Article 37 now provides that audit committees shall include a minimum of three non-executive expert board members among whom at least two members must be independent board members. The Article before amendment stipulated that audit committees shall have one independent board member and allowed companies to complement the membership with expert members from outside of the board of directors, which has been removed from Article 37 on the assumption that board of directors of listed companies must have at least three expert members.
- Board of directors report:
A new paragraph has been added to Article 40 of the Listing Rules to provide for a listed company’s obligation to prepare the board of directors report for presentation to the general shareholders meeting along with the financial statements and to include therein information on all contracts against consideration which a company has entered into with any of its founders, main shareholders or any of their affiliates during the preceding year. Such information must include all the details about such contracts including the date at which they were preapproved by the general shareholders meeting.
- Regulations for disposing more than 50% of the company's assets:
The Decision states that the company is not allowed to dispose more than 50% of its fixed assets and other assets related to its activities, expect when acquiring prior approval from the extraordinary general meeting. The reason behind this is that disposing more than 50% of the company's fixed assets or other assets related to its activities may sometimes be considered liquidation and therefore requires approval of extraordinary general meeting.
- Limitation of cross-ownership:
The Decision added a new article (Article 44 bis) to the listing rules in order to limit cross-ownership. The new article states that a company that is listed and under effective control by an individual or another company is not allowed to own shares in a sister company, or that the sister company owns more than 10% of shares or GDRs in that company. The said article defines control as "ownership of 50% or more of the shares and GDRs of the companies under acquisition".
- Dealing with treasury shares through affiliate companies:
The Decision added a new article to govern the purchase of treasury shares by companies, through their affiliate companies or the ones under their acquisition. Such purchase is considered in the same category as the purchase of treasury shares and thus falls under the same rules that govern treasury shares, in particular with respect to commitment to disposing treasury shares in a year from the purchase date through non-subsidiary companies or ones not that fall under their real acquisition. The concept of "real acquisition" is implemented as stated by Article (44 bis).
Conclusion
This is an important Decree by EFSA due to its clarification of certain ambiguities in the application of the listing rules and because it is likely to contribute to a better surveillance of the market and the protection of minority shareholders by prohibiting cross ownership and tightening supervision on listed companies through detailed disclosure of related party transactions and the membership of independent board members in audit committees. [1] EFSA Board of Directors' Decision No. 35/2016 amending Decision No. 11/2014 on the listing and delisting of securities on the Egyptian Stock Exchange, Official Gazette, Issue 89, on 16 April 2016.Background
The Capital Market Law No. 95 of 1992 provides in Article 16 that EFSA’s board shall issue the rules and conditions governing the listing a delisting of securities on ESE. That being said, decrees have been issued by the Capital Market Authority (EFSA’s predecessor) followed by decrees by EFSA in this respect. The most recent one was decree No. 11 of 2014 approved by EFSA’s board on January 22, 2014. At its meeting dated March 23, 2016, EFSA’s board approved the amendment of decree No. 11 of 2014 as set out in detail below. This amendment aims to improve certain provisions regarding governance rules of listed companies and to limit any harm to the market due to cross ownership of related parties.Amendments
The Decision provides for some amendments of the listing rules. It has amended the definition of “independent board member” and the title of Chapter Four and other provisions. The decree has also added a few provisions to the listing rules as follows:- The amendment of the definition of the term “independent board member”:
The Decision has amended the definition of the term “independent board member” set out in Article 4 of the listing rules to read as follows: An independent board member is “a non-executive board member who is not a shareholder of the company and is not related to the company, its parent company, any of its affiliates or its related parties and has not been connected to them by employment, contractual relationship or board membership during the three years preceding its appointment to the board. He shall also not be the spouse or second degree relative of any of the above persons.” It is worth noting that the Decree has introduced the phrase “who is not a shareholder of the company” which was not included in the article before the amendment.
- The amendment of Chapter Four:
The board of directors of EFSA has amended the titles of Chapter Four and it’s first paragraph to become “Governance, minority protection and financial statements” and “Governance and minority protection” respectively.
- Dividend distribution and entitlement thereto:
The Decision has introduced a new paragraph (c) to Article 33 (Declaring dividends) to provide that shareholders shall be entitled to dividends and bonus shares as soon as the general shareholders meeting approve the distribution. The Decree has further clarified that buyers of shares shall be entitled to such distribution in case the disposal of the shares occurs during the time frame between the general shareholders meeting resolution approving the distribution and the day preceding the date set for the payment.
- Publicity of disclosers:
The amended article further clarifies that small and medium companies must only make their disclosures on the trading screens of the exchange and its website for a period not less than three days. Such amendment aims to clarify the ambiguity of the provision before amendment which may have given the impression that disclosures on the trading screens and the exchange’s website were additional obligations on small and medium companies rather than an exclusive obligation.
- Audit committees:
The Decision amended Article 37 of the Listing Rules governing audit committees and their constitution. Article 37 now provides that audit committees shall include a minimum of three non-executive expert board members among whom at least two members must be independent board members. The Article before amendment stipulated that audit committees shall have one independent board member and allowed companies to complement the membership with expert members from outside of the board of directors, which has been removed from Article 37 on the assumption that board of directors of listed companies must have at least three expert members.
- Board of directors report:
A new paragraph has been added to Article 40 of the Listing Rules to provide for a listed company’s obligation to prepare the board of directors report for presentation to the general shareholders meeting along with the financial statements and to include therein information on all contracts against consideration which a company has entered into with any of its founders, main shareholders or any of their affiliates during the preceding year. Such information must include all the details about such contracts including the date at which they were preapproved by the general shareholders meeting.
- Regulations for disposing more than 50% of the company's assets:
The Decision states that the company is not allowed to dispose more than 50% of its fixed assets and other assets related to its activities, expect when acquiring prior approval from the extraordinary general meeting. The reason behind this is that disposing more than 50% of the company's fixed assets or other assets related to its activities may sometimes be considered liquidation and therefore requires approval of extraordinary general meeting.
- Limitation of cross-ownership:
The Decision added a new article (Article 44 bis) to the listing rules in order to limit cross-ownership. The new article states that a company that is listed and under effective control by an individual or another company is not allowed to own shares in a sister company, or that the sister company owns more than 10% of shares or GDRs in that company. The said article defines control as "ownership of 50% or more of the shares and GDRs of the companies under acquisition".
- Dealing with treasury shares through affiliate companies:
The Decision added a new article to govern the purchase of treasury shares by companies, through their affiliate companies or the ones under their acquisition. Such purchase is considered in the same category as the purchase of treasury shares and thus falls under the same rules that govern treasury shares, in particular with respect to commitment to disposing treasury shares in a year from the purchase date through non-subsidiary companies or ones not that fall under their real acquisition. The concept of "real acquisition" is implemented as stated by Article (44 bis).