Regulation of the Sale of Stakes Ow

On 6 September 2017, the Prime Minister issued a decree regulating the sale of public bank and insurance company stakes in private sector companies (the “Decree”).[1] The new Decree grants state banks and public insurance companies greater liberty in selling their shares in mixed capital companies that are listed on the stock exchange, whether they represent a majority or minority stake in these companies. The Decree provides much more detail than its predecessor, as it distinguishes between the sale of public stakes in listed companies and their sale in unlisted companies. It also addresses cases where the State’s contribution in an unlisted company is through more than one body (such as where two state banks have contributions in the same company), detailing the manner of coordination between the two bodies in the event that one of them wishes to sell its stake. The Decree revokes a 2007 prime ministerial decree which used to regulate these sales.[2]

Background

The administration of State property and assets is a tricky subject, both on the political and legal levels. In addition to complications related to straight-out privatization, such as the sale of state banks or public sector companies in full to private sector investors, there is the complex network of legislations that govern the sale by public bodies of their contributions in mixed capital companies, i.e. companies the capital of which is comprised of public and private sector contributions. Besides rules contained in a few fundamental laws, such as the Public Sector Enterprise Law and its Executive Regulations, a number of implementing decisions were issued in order to regulate the valuation and sale of public sector stakes in mixed capital companies. For instance, prime ministerial decree No. 1684 of 2004[3] had laid out the general rules for the sale of public sector stakes. That decree deferred the responsibility of managing the procedures for those sales to the Ministry of Public Sector Enterprise. It further obligated the Ministry and its representatives to form a committee for the valuation of these stakes. Whereas that system applies to all public bodies (such as public sector authorities and public sector companies), there is a special system in place for the sale of stakes by state banks and public insurance companies that fall under the purview of the Ministry of Public Sector Enterprise. Because of the special nature of these entities, administrative decrees were issued to exempt public banks and insurance companies (in certain conditions) from the complex procedures of the sale of contributions in mixed companies. The most recent Decree is thus an amendment to the special system which governs the sale of securities by state banks and public sector insurance companies.

The Decree

The new Decree regulates the procedures for the sale of stakes by state banks and public insurance companies in mixed companies. A previous decree (in effect since 2007) had allowed these entities to sell without adhering to complicated procedures. The revoked decree had, however, stated that this exception only applies in the event of sale of minority stakes. Also in contrast to the revoked system, the new Decree distinguishes between the conditions for the sale of stakes in listed companies, versus that in unlisted companies. On the one hand, it allows state banks and public insurance companies to sell their stakes in companies listed on the stock exchange in accordance with normal bank or insurance company procedure, in compliance with trading rules, and on condition that the entity informs the Ministry of Public Sector Enterprise of the date for each transaction within one week from executing the sale. The new Decree does not distinguish in that between minority and majority stakes. This means that publicly owned banks and insurance companies are exempt from some procedures relating to the sale of public stakes. On the other hand, with regard to the sale of stakes in unlisted companies, the Decree distinguishes between three cases:

1. In the event that there are no other public sector contributions: meaning where there are no other stakes that are owned by the State, public juridical persons, state banks, or public sector companies. In that case the general rule (exemption) applies, and no special procedure must be followed.
2. In the event where there are other public sector contributions, but owners of such contributions do not intend to sell their stakes: the Decree obligates the bank or insurance company to undergo prior coordination with the other public body, through the Ministry of Public Sector Enterprise, in order to ensure that other public stake owners do not wish to sell.
3. In the event where there are other public sector stake owners, who have a desire to sell their stake as well: prior coordination must take place in order to delegate one public sector entity to undertake sale procedures on behalf of all other public stake owners wishing to sell. The entity delegated through the Ministry then forms a committee to review and evaluate public sector stakes in the mixed company. Said committee must include representatives from a number of State bodies, such as the Ministry of Finance, the Central Auditing Authority, the Central Bank of Egypt, and others. In accordance with decrees already in place, the committee reviews, evaluates, and determines the fair value of the shares in question. The committee may apply common evaluation methods with respect to other contributions. In brief, this is now the only case where the specific procedures contained in decree No. 1684 of 2004 apply to public banks and insurance companies wishing to sell their stake in mixed companies.

It is worth noting that although banks and insurance companies are exempt from some of the aforementioned procedures for the sale of public stakes, all other rules contained in governing laws and regulations – such as the Public Sector Enterprise Law, and the Central Bank and Banking System Law – still apply with no exceptions. In other words, state banks and public insurance companies are only exempt (in certain cases) from the rules and procedures contained in prime ministerial decree No. 1684 of 2004, but not from all other relevant legal procedure.

Conclusion

The most recent Decree takes into consideration the special nature of banks and insurance companies, which, in practice, require the sale and purchase of shares in a systematic and frequent manner. This necessitates some flexibility in procedure, and renders the formation of a committee that is comprised of several state authorities and having to wait for evaluation results – in addition to the ratification of said results – inconsistent with the needs and nature of bank and insurance company operations. Therefore, the exceptions and exemptions introduced for banks and insurance companies by the most recent Decree are in order. In addition, the Decree distinguishes between the treatment of listed companies and that of unlisted companies. This is a logical and necessary distinction, as the sale of listed shares is indeed regulated by virtue of the rules set out by the Egyptian Stock Exchange. These rules contain several guarantees, in addition to clear procedures for the valuation of a fair sale price. On the other hand, the manner of applying said guarantees in relation to unlisted companies remains unclear. This is especially so, given that the Decree has facilitated sale procedure – in the event that there are no other public stakes in the company in question, and no desire to sell – without offering a clear alternative to determine fair price or sufficient guarantees.   [1] Prime Minister’s Decree No. 1962/2017 on the Sale of Contributions of Public Banks and Insurance Companies in Mixed Companies, Official Gazette, Issue No. 35 (bis), 6 September 2017. [2] Prime Minister’s Decree No. 1874/2007 on the Sale of Contributions of Public Banks and Insurance Companies in Mixed Companies, Official Gazette, Issue No. 34 (bis), 25 August 2007. [3] Prime Minister’s Decree No. 1684/2004 on Delegating the Ministry of Investment in Coordination with Relevant Bodies to Undertake Procedures for the Sale of Public Sector Stakes in Mixed Companies, Official Gazette, Issue No. 41, 7 October 2004.