Stock Exchange Listing Rules Signif

In the last week of September, the Egyptian Financial Supervisory Authority (“EFSA”), issued a major amendment to the Egyptian Stock Exchange Listing Rules (“Listing Rules”) which will affect the listing requirements for companies as well as the rules governing disclosure and the prevention of insider trading and other market abuses.

Legal Background

The Egyptian Stock Exchange (“EGX”) is an independent body and accordingly has the legal capacity to issue it own rules of operations, except where this is explicitly reserved by law to either the regulatory body – i.e. EFSA – or to the Ministry of Investment. One of those exceptions concerns the listing rules which are expressly reserved to the EFSA in accordance with the Capital Market Law (“Law”). It is worth reminding that EFSA is the legal successor of the Capital Market Authority since July 1^st, 2009 when the latter was created by Law No. 10 of 2009 and made to replace the Capital Market Authority, the Insurance Supervision Authority, and  the Mortgage Finance Authority (See Egypt Legal Update .., .. and …). Listing Rules, on the other hand, are the rules applied by the Exchange – EGX – allowing the listing and delisting of securities and providing the conditions for the continuing listing of those securities. The current Listing Rules were originally issued IN 2002 by Decree of the Capital Markets Authority’s Board of Directors, then amended significantly in 2006, and finally amended again recently by EFSA Decree No. 50 of 2009, and made effective as of November 8^th, 2009.

Key Aspects of the Amendments

The recent amendments to the Listing Rules deal with various key subjects:

• Independence of the Exchange.
• Redefining “Insiders” and “Related Parties”.
• Listing Requirements.
• Re-listing Requirements.
• Definition of “Insiders” and “Related Parties”.
• Auditing Committee.

Following is some elaboration on the previous issues.

Exchange Independence

The Egyptian Stock Exchange (“EGX”) is an independent body of the EFSA, in fact the former is regulated by the latter. However, so far the Listing Committee of the Exchange included a member representing the EFSA (previously the Capital Market Authority). The recent amendment to the Listing Rules attempt to ensure wider independence of the Exchange by changing the composition of the Listing Committee whereby it longer includes a representative of EFSA. However, and in order to ensure that there is sufficient coordination between the two bodies, the Rules now state that all decisions of the Committee must be reported to EFSA within three days.

Redefining “Insiders” and “Related Parties”

One of the key subjects of the Listing Rules is the prevention of abuse by insiders and related parties of information or other privileges obtained as a result of their proximity to decision making in listed companies. The Listing Rules already included various provisions governing this subject. However, with time, some of those provisions have turned out to be difficult to apply, or to cause inconsistencies. Thus the amendment to the Listing Rules redefined “related party” to be any party with direct or indirect relationship with a company whereby (i) this party has control over the company or they are both under the same control, (ii) this party owns enough shares in the company to exercise control, (iii) this party is a managing director or a member of the company’s board or of its parent, subsidiary or sister company, (iv) this party and the company are both under the effective control of one person, or (v) this party is an entity representing a retirement or a bonus plan in the company. Moreover, the Rules redefined “insiders” as members of the board of directors of a company, or of its parent, subsidiary or sister company, or a company under its control, in addition to their representatives, spouses, and children under age, as well as employees and advisers to the company who have the capacity to obtain insider information and their spouses and children under age.

Listing Requirements

Prior to the amendment, companies wishing to list their securities had to show – among other requirements – that they had made in the last financial year a 5% profit on capital from their core business. As a result of the financial crisis last year, companies which continued to show strength have not made those profits, and accordingly not been able to go public. The new Rules now allow companies to list their securities if they show a 5% profit from their core business but as an average of the preceding three years. This allows a longer view of the company performance to be the basis for listing.

Re-Listing Requirements

Once a company is de-listed, it continues to have the right to list again (re-list) if it meets the conditions for listing once more. Previously, however, the Rules did not allow a company to re-list except after the submission of either one or two year’s audited financial statements. In practice, this meant that the delisting of a company necessarily entailed its incapacity to list again for one or two years at a minimum. This situation meant that the de-listing of companies carried an implicit punishment of being barred from the Exchange for a significant period of time. Now the new Rules allow the Listing Committee of the Exchange to consider re-listing companies anytime following the de-listing. This, however, is a discretionary matter for the Committee which could still require delay or the submission of financial statements as a prerequisite for re-listing, presumably where the cause of de-listing was a significant one. But the power to re-list companies immediately now exists for the Listing Committee.

Audit Committee

Since 2008 the Listing Rules clearly included provisions on the composition and scope of activity of listed companies’ Auditing Committee. This was a key and welcome transformation of the market and one which led to a higher standard of corporate governance being applied. Two issues, however, turned out to be difficult to apply:

• The first is that listed banks found themselves caught between two sets of requirements, since the Banking Law (No. 88 of 2002) had its own auditing committee provisions for banks – whether listed or not – and the Listing Rules had their own standards and requirements which differed from the former. Although the discrepancy was not fundamental, it still caused some confusion for banks which were listed. This is now resolved as the new Listing Rules expressly state that banks which are listed on EGX will follow the auditing committee requirements of the Banking Law and its Executive Regulations.

• The second is that one of the functions of the Audit Committee was to report on related-party transactions to the company’s general assembly and whether they were conducted on an arms-length basis prior to their conclusion. This represented a major obstacle for companies which significant inter-group dealings. The amendments now require the Audit Committee to report on those transactions in the following general assembly.

Conclusion

The new amendment brings same interesting ideas and novel approaches, especially with regard to listing and de-listing requirements. The definition and application of "insider" and "related parties" will need further explanation and market awareness in order to be fully applied and appreciated.