Following the Most Recent Amendment

On 11 February 2018, the Egyptian Gazette published Ministry of Investment decision No. 16 of 2018 amending the Executive Regulations of Companies Law No. 159 of 1981 (“ER’).[1] The amendment of the executive regulations mirrors the recent amendment of a significant number of provisions of the Companies Law.

Background

On 16 January 2018 a broad range of amendments to Law No. 159 of 1981 on Joint Stock, Limited Partnerships, Limited Liability Companies, and One-Person Companies (the “Law”), were published in the Official Gazette, representing the most significant change to the Law since its enactment in the early eighties. An amendment to the Executive Regulations reflecting the changes in the Law followed earlier this February 2018. Together, the amendment of the Law and its Executive Regulations introduce the ‘one-person company’ as a new legal form of company offering limited liability to the founder. In addition, significant corporate governance provisions were modified and/or added. These result in significant changes to the rules and procedures governing ordinary and extra ordinary general assembly meetings, the election of board members, financial statement disclosure and publication requirements, access to company records and information, minority shareholder rights, the acknowledgement of shareholder agreements, and the buyback of treasury shares. Companies that are subject to Companies Law No. 159 of 1981 have been given a grace period of one year to apply the new rules. In our ELU issue of January 2018 Week 4, we have covered key parts of the amendment to the Companies Law introduced by Law No. 4 of 2018.[2] The following is a more comprehensive review of the new amendments to the Law, with the addition of the most recent amendment to the Executive Regulations issued this February.

1. The One-Person Company

The amendment to the law in January 2018 introduced a new form that is the limited liability one-person company. In this respect, the ER amendment provides the detailed rules and procedures governing the newly introduced one-person company. Eight provisions [Articles 287 (bis) to 287 (bis 7)] were added to the ER for that purpose. The amendment mirrors the rules provided in the Law concerning the one-person company in that any natural or legal person may establish it. It also prohibits that a one-person company establishes another one-person company. The new provisions also contain establishment procedures and capital requirements. The capital of a one-person company may not be less than EGP 50,000 and must be paid in full at establishment. Furthermore, capital contribution may not be in the form of traded shares, as one-person companies are not allowed to issue shares or acquire financing through issuing traded securities. A one-person company may not offer its shares for public trading, nor may it undertake the following activities: insurance, banking, saving, deposit or investment on behalf of other persons. The newly added provisions defer to the rules applicable to limited liability companies in any matters that have not been specifically covered. The amendment to the Law and the ER delineate cases in which the founder of a one-person company will become liable in all of their personal money that are:

1. In the event of liquidation in bad faith;
2. Pre-mature suspension of company activity prior to achieving its purpose;
3. If the founder does not maintain clear separation between personal and company funds;
4. If they conclude contracts or transactions that are not necessary for establishment while the company is under establishment; or
5. Violating fair market value while dealing with the company or in order to evade taxation.

In the event that the minimum number of required shareholders falls below the legal threshold of three for joint stock companies and two for limited liability companies, the remaining shareholder(s) should within six months try to complete the threshold, or request a transformation into a one-person company.

2. Company Name and Headquarters

Prior to the amendment, the Law required that the name of the company be derived from its activity or an indication thereof. As a general rule therefore, company name could not contain a shareholder’s or partner’s name. The new rules allow a company name to contain a partner’s name or title, and the ER was amended to reflect said change. The amendment also explicitly required that companies publish any change in the location of their headquarters in the commercial register, or face the consequences of having any communication sent to the registered location.

3. Establishment

The amendment to the Law states that the General Authority for Free Zones and Investment (“GAFI”) is responsible for establishment and post establishment services for companies that are subject to the Companies Law. The amendment further echoes provisions in Investment Law No. 72 of 2017 that provide for electronic company establishment. This is notwithstanding the authority of the Financial Regulatory Authority and Special Economic Zone authorities in establishing the companies that are subject to their supervision. The provision concerning notifying GAFI of company establishment was also modified in the Law. In this respect, the ER amendment lists the documents required for establishment by notice (note that the word ‘notice’ was not present in these ER provisions before) for joint stock and limited partnerships. The following has been added to the list of required documents for establishing these two types of companies: i) approval of relevant authorities if the company’s activity requires special approval, ii) a certificate showing that all of the company’s securities have been subscribed into, iii) a certificate from the central depository company proving registration of company securities, and iv) a receipt showing that a fee equal to 0.1% of the company’s issued capital has been paid. As for limited liability companies, the list of required documents for establishment by notice is the same in the ER except, that the requirement to submit a receipt proving deposit of the full value of company shares with a licensed bank has been changed to requiring a receipt proving that a fee equal to 0.1% of the company’s paid capital has been paid. This is in addition to any approvals from relevant authorities in relation to the company’s activities. The ER amendment also adds an Article (45) bis detailing the steps and procedures for using GAFI’s unified electronic establishment and post establishment services system (soon to be activated).

4. Shareholder Agreements

One of the most important amendments to the Law is the introduction of legal provisions to govern an already existing concept that is the shareholders agreement. The amendment to the Law has bestowed some formality on the matter by introducing a new provision allowing partners to enter into shareholder agreements among themselves in order to organize their relationship, whether before or after the establishment of the company. The same provision also allows these agreements to be enforceable vis-à-vis other shareholders or third parties, as long as the shareholder agreement has been ratified by an extra-ordinary general assembly by virtue of a majority representing at least three quarters of the company’s capital - unless the executive regulations define a higher majority in specific cases. In this respect, the ER amendment provides that a higher majority (than three quarters of an extraordinary general assembly meeting) is required in the following cases:

• If the agreement results in additional voting rights or rights to profit distribution at liquidation;
• If the agreement is a related party contract; or
• If the agreement places restrictions on the trading of securities or company management.

5. Valuation of In-kind Contributions to Capital

Article (25) of the Law provides for the establishment of a committee at GAFI for confirming the validity of the value assessment of any proposed in-kind contributions to capital. The amendment states that the committee is obliged to comply with the rules, procedures, and standards which the executive regulations are to specify, in addition to the Egyptian Standards of Real Estate Valuation, and those of Business Financial Valuation. The amendment requires that the committee concludes its assessment within 60 days from the date of submitting a request. The ER was amended to reflect said changes. It removes a cap of EGP10, 000 on fees that are paid to GAFI in return for valuation services, and states that the valuation committee is to be established by virtue of a Minister of Investment decree.

6. Corporate Governance

• Board of Directors

Prior to the amendment the Law stated that the board of a joint stock company convened by an invitation from its chairman, or a call by one third of its members, or whenever there is a necessity for convening. Article (80) was amended to state that the board convenes by an invitation from its chairman, or the majority of its members if the chairman seat becomes vacant. In addition, one third of the board members may submit a written request to the chairman in order to convene a meeting. If the chairman does not call for said meeting within 10 days from the date of the request, the requesting members could convene a meeting and invite GAFI to attend, given that an invitation to GAFI and all other board members must be sent at least three days prior to the date of the meeting according to an ER amendment. In any event, a board meeting will not be valid unless attended by a majority of the board members. The Law amendment also allowed board meetings to be held outside of the company headquarters and through modern telecommunication methods. The ER adds that other voting methods including electronic voting could be used if ratified by GAFI. A new paragraph was added to Article (86) of the Law which states that in the event the position of board chairman becomes vacant, the member with the second highest vote count takes his/her place as chairman and completes the term until its end. The provision deals with the event of more than one third of positions on the board becoming vacant, in which case the remaining members must convene a general assembly meeting within 30 days in order to elect board members to replace the missing ones. The ER amendment mirrors this obligation, and states that in the event the position of board chairman becomes vacant, the most senior remaining board member calls for a general assembly meeting and he/she chairs that meeting unless someone else is elected to chair the meeting. The ER amendment adds an obligation that GAFI be notified within three business days in the event that the number of board members of a joint stock company falls below three. In the event that a general assembly is not convened by the company to replace the missing members, GAFI can call for one. Article (98) of the Law prohibits a board member of a joint stock company or its manager from trading for their own account or the account of others in the same business of the company. A new paragraph was added to this Article which also prohibits board members from divulging any company secrets that have come to their knowledge because of their being on the board or in the company’s management. The ER amendment provides that the first board of directors, appointed by the founding committee in a company under establishment, may choose the first chairman of the board, manager, and a chief executive officer; the latter being an addition to the original provision. In this respect, the Law after amendment states that either the chairman of the board of a joint stock company or a chief executive officer represents the company before courts, while in the past only the chairman of the board played that role. New provisions in the Law and the ER were introduced for minority protection purposes. These allow the company’s articles of association to include a provision guaranteeing one seat on the board of directors of a joint stock company for every 10% of capital.

• General Assembly

Meetings & Quorum – The amendment requires that the annual general assembly meeting be convened within three months of the end of the fiscal year, instead of six months previously. Financial statements must be published in two daily newspapers within two months from the end of the fiscal year, instead of three months in the past. The quorum for ordinary general assembly meetings was not changed. It must still be attended by shareholders representing not less than 25% of capital. However, the amendment has made that contingent on the incorporation contract not having provided a higher quorum (which in any case may not exceed half of the capital). Attendance – In general, shareholders have been allowed to attend general assembly meetings by way of representation as long as they issue a formal power of attorney to the representative. The amendment now explicitly allows representation to be through a power of attorney or proxy. Moreover, the representative does not now have to be a shareholder in the company. In this respect, the amended ER now states that the representative could be a custodian, or a registered owner as defined in the Central Securities Depository Law. Weighted Voting System – The amendment to the Law also introduced a new rule which allows the articles of association to contain a system of cumulative voting for the election of board members by the general assembly. The ER amendment clarifies the mechanics for implementing this new rule. Electronic Voting – A provision in the amendment to the ER allows for electronic voting in general assembly meetings for companies registered in the central securities depository system. Losses Exceeding 50% – The Law had previously required the convening of an extraordinary general assembly to determine whether or not to dissolve the company in the event of a loss exceeding 50% of the company’s issued capital. The amendment now states that said determination must be made if the loss exceeds 50% of the company’s shareholders’ equity. Extraordinary General Assembly Meetings – The ER now explicitly defers the matter of decreasing the company’s issued capital to the extraordinary general assembly. In addition, an extraordinary general assembly meeting is no longer required for the amendment of the company’s articles of association when the board is increasing the issued capital within the bounds of the authorized capital. Rather, a board of directors’ resolution is now required for making that amendment. Revocation of Detrimental General Assembly Actions – A new provision was added to the Law that is applicable vis-à-vis listed companies, companies that have offered their shares to the public, and companies undertaking nonbanking financial activities. The new provision allows the representatives of at least 5% of capital to submit a request to GAFI in order to suspend or revoke a general assembly resolution that was issued in favour, or to the detriment of, a certain category of shareholders, or in the special interest of a board member or other parties.  Said request may only be submitted within 30 days from the date of the resolution.

• Managers in Limited Liability Companies

The Law prohibited that the manager of a limited liability company be a convict in certain misdemeanours or felonies. The ER also stipulated that at least one of the managers had to be Egyptian. The amendment to the ER adds to this that in the case that the company has more than one manager, the partners may appoint a board of managers. The ER amendment also deals with the removal of managers in a limited liability company. A majority of the partners in said company may remove managers. In addition, while reviewing the company’s annual financial statements, the general assembly may choose to renew or not renew for a manager. If a manager is removed by the general assembly, another must be appointed to replace him/her.

• Access to information

While the Law already allowed any shareholder to review company records and obtain copies thereof (with restrictions regarding sensitive information); the amendment added a provision which only allows the owners of a 10% equity in the company to obtain information concerning related party contracts. If the company refuses to submit said records, the representatives of the 10% share may submit a request to GAFI, in which case an affirmative decision from GAFI is binding and enforceable against the company.

• Financial Statements

A new provision in the ER requires that joint stock companies submit additional information along with their annual financial statements including the number of employees in the company, its investment, the organizational chart, and branches and operation locations, this is in addition to a list of debts owed by the company to shareholders and vice versa. Furthermore, the Law now requires that all joint stock rules concerning auditors, stock inventory, and financial statements be applied to limited liability and one-person companies.

• Annulment of Related Party Contracts

The amendment to the Law provides for the right of shareholders in annulling related party contracts which are proven to not be in the company’s interest, or that are concluded to its detriment. Shareholders may sue those in charge of management of the company for any damages incurred by them or by the company as a result of any said contracts. They may also claim a return of any resulting profits. An identical provision was added to the ER without any additions.

7. Founder shares

One of the restrictions that have been eased in the recent amendment to the Law concerns founding shareholders shares in joint stock companies. Prior to amendment, Article 45 of the Law prohibited the trading of those shares by the founding shareholders to third parties before the lapse of two fiscal years. Nevertheless, the investment law provided for an exception allowing the Minister of Investment to approve such sale for companies that are subject to the investment law. This rule created an unnecessary hurdle to investment activity and prompted many to undertake unregistered transactions on their shares, which in turn created its own risks. The amendment attempted to overcome this situation by limiting the restriction to the trading of shares that are issued in consideration for an in-kind contribution. The ER was amended to reflect said change.

8. Spin off

Of the significant stipulations of the most recent amendments to the Law is the introduction of a clear process for company spinoffs. The amendment to the Law states the valuation of the assets of the resultant companies shall be undertaken in the same manner as the valuation of in-kind contributions (as mentioned above). A resultant company may not be a one-person company. The decision to split the company must be taken in an extraordinary general assembly meeting by at least three-quarters of capital. The shares of resultant companies may be traded immediately following their issuance after the split. This is as long as there are no other restrictions which prohibit their trading. Similarly, the ER amendment adds a new chapter to the ER aimed at facilitating company spinoffs. Under new articles (299 bis to 299 bis 5), the amendment defines the term to be the division of company assets and activities, related obligations and property rights, between two or more companies whether in a horizontal or a vertical demerger. A horizontal demerger is defined as when company shares resulting from the demerger end up being owned by the same shareholders who owned them prior to divestiture, and in the same percentages. On the other hand, a vertical demerger is when the spinoff is through divesting part of the company’s assets and activities in a new company (a subsidiary) that is owned by the parent company. Asset and obligation divestiture must be in book value (unless GAFI approves another method of valuation) and detailed general assembly procedures must be followed. Resultant companies are considered legal successors of the original company, and they substitute it in all rights and obligations.

9. Preferential shares

Prior to the amendment of the Law, a company was not allowed to issue preferred shares unless its by-laws contained a provision allowing that at incorporation. The amendment contained a new provision allowing a company to issue preferred shares, even if such was not provided for in its by-laws at incorporation, so long as an extra-ordinary general assembly vote representing three quarters of the company’s capital is obtained. However, a preferred share may not carry both voting and liquidation privileges. The ER was amended to reflect said changes.

10. Treasury shares

Treasury shares are the company’s own shares that are bought by it in order to reduce its capital, be offered to company employees, or to retain for a period of time. Prior to amendment, the Law’s regulation of treasury shares was limited to a provision stating that a company may not retain these shares for longer than one year. However, the amendment of both the Law and the ER has handled this matter with some detail.

11. Liquidation

The Law had provided that a liquidator is liable towards the company if they mishandle the administration of the company’s affairs during liquidation. The liquidator is moreover liable for indemnifying shareholders and third parties against damages resulting from a wrongdoing. A new provision was added which limits the time period during which a lawsuit may be initiated against the liquidator to three years from the date of the liquidator’s committing the error, or the date of knowledge of the error. This is except in cases of fraud where the statute of limitation for bringing a lawsuit against the liquidator is 15 years from the end of the liquidation procedures. Lawsuits that are brought by shareholders against one another are only acceptable if they are filed within five years from the end of the liquidation procedure. A lawsuit by a third party against a shareholder may not be brought except within five years from the date of the publication of the end of the liquidation procedure in the commercial register.

12. Petitions

The amendment to the Law had added (Art 160 bis) which provides for the establishment of a petition committee by the Minister of Investment in order to review complaints against GAFI’s administrative decisions issued in relation to the Companies Law. The ER amendment adds a new chapter to the Executive Regulations titled “Petitions”. The new chapter contains the timelines and required documentation for challenging decisions by GAFI or the Investment Minister before the petitions committee. The committee must render its decision within 60 days from the date of submission of the request, or from the date of submission of the latest clarifications that may have been required by the committee. The complainant submitting the petition must pay a deposit of EGP 5,000 that is returned minus 10% if the committee’s decision is in the complainant’s favour. A new Article (164 bis) in the Law provides that the Minister of Investment may enter into settlements with respect to crimes related to the Companies Law - as listed out under Article (163) thereof – at any stage of the criminal lawsuit. This is contingent on the payment of double the minimum value of the prescribed fine. Settlement under this provision suspends any criminal proceedings, and the general prosecution requests a stay on the enforcement of a penalty if settlement is reached during enforcement, even if the court judgment is final.   [1] Minister of Investment Decision No. 16/2018 amending certain provisions of the Executive Regulations of the Companies Law issued by virtue of Decision No. 96/1982, Egyptian Gazette, Issue No. 34 (cont.), 11 February 2018. [2] Law No. 4/2018 amending certain provisions of the Companies Law No. 159/1981, Official Gazette, Issue No. 2 (bis) (t), 16 January 2018.