Amendments to the Regulation of Pub

The Ministry of State-Owned Business Sector issued a new decision that changed the regulations governing the representation of public funds in companies that own shares in holding and subsidiary companies (joint companies), both of which are subject to the Ministry.[1] The Decision implemented many good governance principles, such as putting an upper limit to the cycle of representing public funds in board of directors, necessitating certain credentials in those who are represented, and establishing measures to avoid conflict of interest. In addition, the decision gave the Ministry of State-Owned Business Sector a bigger role in identifying public funds’ representatives in the relevant companies. The Decision gave holding and subsidiary companies, subject to the Ministry, up until December 2016 to accommodate for the new standards.

Background

The Prime Minister had issued a decree in March 2016 creating the independent Ministry of State-Owned Business Sector,[2] thereby relocating the sector from under the Ministry of Investment’s jurisdiction. As we have discussed in our April 2016 ELU issue, the state-owned business sector is subject to the State-Owned Business Sector Companies Law No. 203 of 1991, which currently includes eight holding companies and 125 subsidiaries that have been gradually transferred from the public sector since 1991, in order to be restructured and managerially redeveloped then partially sold to the private sector. In 2004, this whole sector was subsumed under the, at the time, newly minted Ministry of Investment. The Ministry of Investment’s portfolio also included the General Authority for Investment and Free Zones and the supervisory bodies of the non-banking financial sector. Now, however, the State-Owned business sector is under an independent Ministry. The Decision creating that Ministry stated that it is responsible for “managing state investments owned by companies in the state-owned business sector, supervising those companies, and evaluating their work product”. The decision to create an independent ministry did not ultimately alter the mechanisms that were formerly employed in managing the state-owned business sector. It did, however, demonstrate the state’s interest in this sector and its development. The final decision came within the context of the government's program that was submitted to the Parliament, in which its “vision and economic program” included some of the features of "the development of state-owned assets and restructuring of public sector companies" plan. This entailed the development of a program to restructure these companies and evaluate their boards of directors and chairmen. It also entailed periodically following up on their performance in order to maximize the sector’s contribution to the Egyptian economy. Moreover, the government’s program also included the establishment of a fund to manage the state-owned assets, as well as two plans for the development of the textile companies and the iron and steel company. However, no details related to the implementation mechanisms of that plan were mentioned.

Representation of Public Funds’ Regulations          

The main characteristics of the Ministry of State-Owned Business Sector’s Decision regarding the regulation of Public Funds representation are as follows: 1. It seeks to ensure that the representative’s level of experience corresponds to the position he is filling and the nature of the company and the sector involved. 2. Avoiding conflict of interest. 3. The nomination of the representative becomes a more centralized decision as the Ministry is given a bigger role in the process. The decision brought on many changes that are influenced by good governance principles as it mandated that holding and subsidiary companies strive to maintain higher levels of experience in the representatives it nominates for the board of directors of the companies that it owns shares in (joint companies), bearing in mind that the representative’s experience needs to correlate to the company’s field and size. It also needs to be consistent with the legislations regulating some of those fields where it requires particular attributes in members of its board of directors. The Decision also requires that the public funds representative be informed of the company’s condition. The representative must also participate in preparing the company’s studies and develop a quarterly review that covers its financial and operational status. As such, the Decision is pushing for establishing an effective and proactive role for the public funds’ representative in the joint companies’ board of directors. In an attempt to prevent conflict of interest in public funds’ representatives, the Decision prohibited any one person from representing more than two joint companies at the same time. In the event that a person is already a board of directors’ member in one of the holding or subsidiary companies subject to the Ministry of State Owned Business Sector, then they are not allowed to be a public funds’ representative in more than one company, which means that the total number of companies that public funds’ representatives play a role in cannot exceed two companies. This is in line with the Prime Minister’s Decree number 606 of the year 2008 “regarding representatives of the state, public legal entities, banks and other public sector and state-owned business sector companies in joint banks, investment companies, and others”. The decision also mandated the public funds representative to eschew conflict of interest that might arise from being a member on a board of directors, whether personally or through a relative of the fourth degree, and to immediately notify the company and official bodies if a conflict arises. It is noteworthy that the decision does not broach the subject of conflict of interest consequences. The Decision also placed a cap of three years, with a one-time possibility of renewal, on representing a joint company. However, it did not put a limit on the number of times that one person could spend as a public funds’ representative in multiple joint companies. Accordingly, it allows for the representative to move from Company A (after 3 years) to Company B, then Company C, without putting a ceiling on the total number of years during which they can represent public funds for joint companies. The Decision also further centralized the process of selecting representatives of state-owned business sector companies since it necessitated that holding and subsidiary companies “not elicit objections” from the Ministry of State-Owned Business sector on their nomination to public funds’ representatives before they can appoint them or even renew their appointments. The Ministry’s approval is contingent upon the nominee submitting several documents to the Ministry so that it can assess whether or not they meet the standards, vis-à-vis the existence of a conflict of interest for example. The Ministry also reviews the status of the company that the representative is nominated to represent and its profits and losses. The decision also prohibited the use of authorization to allow for attending the joint company’s board of directors’ meetings except in cases of emergency and on the condition that quarterly reports on such an occurrence. The Minister of Investment’s decision number 180 for the year 2008 – which has been substituted by the Ministry of State-Owned Business Sector in the past year – required that bodies and companies under the purview of the Ministry of Investment (and which are now fall under the Ministry of State Owned Business Sector) notify the Ministry of Investment with their nominations for public funds’ representatives before making an appointment, but it did not require the approval or “lack of objection” of the Ministry, which means that the Ministry of the State Owned Business Sector has acquired more power compared to its predecessor, the Ministry of Investment, enabling it to interfere and affect the appointment decisions.   [1] Minister of State-Owned Business Sector’s Decision No. 29/2016, Egyptian Gazette, Issue No. 188, 18 August 2016. [2] Prime Minister’s Decree No. 873/2016 creating the independent Ministry of State-Owned Business Sector, Official Gazette, Issue No. 13 (cont.), 31 March 2016.