New Rules for Acquisition of Broker

  The Board of Directors of the Egyptian Financial Supervisory Authority (“EFSA”) recently issued a decision requiring any person (whether a natural or legal person, Egyptian or non-Egyptian), to obtain EFSA’s approval before directly or indirectly acquiring shares exceeding one third of the share capital of any securities brokerage company or investment fund management company, if its market share exceeds 10% (the “Decision”).[1] Background EFSA’s Decision is effectively implementing the November 2016 amendments to the Executive Regulations of the Capital Market Law. The amendments added a provision requiring any person undertaking the type of acquisition described above to obtain the approval of EFSA’s Board of Directors, and required EFSA to enact specific rules to regulate this, which is what the recent Decision seeks to achieve.[2] A detailed analysis of these amendments can be viewed in the November Week 3 Issue of the Egypt Legal Update. Details of the Decision The Decision obliges any person to obtain the approval of EFSA’s Board of Directors prior to directly or indirectly acquiring shares exceeding one third of the share capital of any securities brokerage company or investment fund management company. This is only applicable if such companies have a market share exceeding 10% of the respective markets. This, in turn, is calculated based on the latest quarterly financial statements of investment funds in the case of fund management companies and on the latest quarterly value of transactions in the case of securities brokerage companies. In addition to the approval necessary when acquiring more than one third of these companies, the Decision also requires further approval when obtaining more than 50%, and again when obtaining more than two thirds of the shares. The Decision (in line with the amended Executive Regulations) clarifies that any acquisition not in compliance with these rules shall be null and void. It also includes a list of documents that must be presented with the request for approval. The list differentiates between documents required by natural persons and others required by legal persons, and provides details in special cases, such as when the acquisition partly results from a trust. On 17 December 2016, EFSA issued another decision detailing the fees associated with the requests for approval, which it determined as 0.025% of the value of acquired shares or EGP 20,000, whichever is greater.[3]  

1. Effective Control and Acquisition

The Decision defines in details what is meant by “effective control” and “acquisition” of companies in this context. It provides that “effective control” means for a natural person (personally or through his/her spouse and minor children) or a juristic person to own any percentage interest that enables it to nominate the majority of board members of a given company or to control the resolutions of such company’s board of directors or general shareholders’ meetings. Shares owned by a juristic person as well as shares owned by any of its board members or any other juristic person under common control of other natural or juristic persons shall count towards the juristic person’s interest in a given company. Furthermore, the aggregate owned by any natural or juristic persons who have a voting agreement leading to the control of the board of directors or the general shareholders meeting shall count towards determining whether a group of persons has effective control. The definition of “effective control” in the Decision is almost identical to that provided in the amendments to the Executive Regulations of the Capital Market Law. The Decision, however, includes an additional definition of “direct acquisition” and “indirect acquisition”. Direct acquisition, according to the Decision, means acquisition of shares in brokerage or fund management companies by the person who seeks such acquisition or by the people/entities included in the definition of “effective control”. Indirect acquisition, on the other hand, occurs when a person owns 50% or more of shares or voting rights in an entity which, in turn, owns (solely or through its affiliates) more than a third of the capital of brokerage or fund management companies.

2. Acquisition through Inheritance

While the Decision deals mostly with new acquisitions and effective control, it also – in line with the amendments to the Executive Regulations – takes a position on cases where a person becomes, through inheritance or will, owner of a shareholding that exceeds the limits discussed above. Such person shall ensure compliance within a period of two years. Failure to do so would mean that such person cannot exercise any voting rights for the shares exceeding the limits set out in the previous article. The Decision requires such person to submit a request within a month of learning of the acquisition through inheritance/will.

3. Criteria for EFSA’s Approval

The Decision includes a list of criteria, which EFSA will rely on in determining whether or not to grant approval. These include:

• The current shareholding power of the person seeking to acquire new shares in the relevant company, as well as in other companies in the same sector. The effects of the new acquisition on competitiveness and on the concentration of risks in the capital market and in the specific sector that the company operates in will also be assessed.
• The added value resulting from the potential acquisition.
• Whether the person seeking acquisition has sufficient competence and practical experience.
• Whether there is another investor in the company with a similar shareholding power.

[1] EFSA’s Board of Directors Decision No. 135/2016 on the Rules for Acquisition or Control of Securities Brokerage Companies and Investment Fund Management Companies in Line with Articles 328 (bis) and 328 (bis)(a) of the Executive Regulations of the Capital Market Law, Egyptian Gazette, Issue No. 281, 14 December 2016. [2] Minister of Investment’s Decision No. 95/2016 amending certain provisions of the Executive Regulations of the Capital Market Law, Egyptian Gazette, Issue No. 251, 8 November 2016, Art. 328 (bis). [3] EFSA’s Board of Directors Decision No. 136/2016 on the Fees for Approvals of Acquisition or Control of Securities Brokerage Companies and Investment Fund Management Companies in Line with Articles 328 (bis) and 328 (bis)(a) of the Executive Regulations of the Capital Market Law, Egyptian Gazette, Issue No. 283, 17 December 2016.