Prime Minister Issues New Privatiza

On 14 May 2018, the Prime Minister issued Decree No. 926 of 2018 with new regulations for the government’s program of offering state-owned company shares – wholly or partially - or expanding the equity structure in said companies.[1] The program is aimed at applying the privatization scheme which the government has repeatedly announced over the past months. However, the importance of this decree lies in the fact that it precedes an actual enforcement of the new privatization program after years of suspension following the 2011 revolution. The new decree tackles a number of main points which it regulates, namely (1) identifying companies that fall within its scope, (2) setting the objectives of the privatization program, (3) identifying the entity which will supervise the implementation of the program, (4) introducing the concept of a “public funds offering advisor”, (5) setting out offering procedure, (6) laying out the framework for valuating the shares that are subject to sale, and (7), providing rules concerning the liability of the boards of companies whose shares are being offered as well as boards of their parent companies.

Scope of the Program

The new decree applies to state-owned companies or those in which the state owns stakes. These include: (1) companies subject to the Public-Sector Enterprise Law, (2) joint stock and limited liability companies that are subject to Companies Law 159 of 1981, and (3) any other companies with state shareholding that is subject to any other laws, including the Investment Law, Public Sector Companies Law, and others.

Program Objective

According to the decree, the aim of the program for the offering of state-owned shares is to:

• Enhance activity on the Egyptian Stock Exchange by offering new shares and increasing market liquidity;
• Attract foreign investment;
• Diversify sources of state income;
• Improve market transparency and governance.

Entity Supervising Program Application

The new decree provides for the establishment of a new ministerial committee of which the Minister of Finance is the rapporteur. Members in the committee will include the ministers of investment, petroleum, trade and industry, planning, public enterprise, and the Head of Cabinet Legislative Affairs. The committee is tasked with the following:

• Laying out the offering program, including timeline, supervising implementation, and following up with the relevant ministries;

• Ratifying the choice of investment banks who will carry out the offering following an appraisal of said institutions by a public funds offering advisor, or the Minister of Finance;

• Identifying companies that will enter the program and the stake that will be offered, upon coordinating with the owning entities;

• Supervising parent companies’ plans for restructuring or enhancing subsidiaries’ performance in order to raise their value prior to offering;

• Identifying companies that are to be merged to create larger entities in anticipation of offering;
• Ratifying decisions by Fair Value Assessment committees for offered companies.

Public Funds Offering Advisor

The new decree introduces a definition not known in previous privatization related decrees, and that is the “public funds offering advisor”, defined as the investment bank chosen by the Ministry of Finance to administer the offering of one or more companies. While most privatization programs in Egypt and the world know the offering bank system, what is novel in this legislation is that it specifies that the definition of what is meant by a public funds offering advisor is “NI Capital, or an investment bank that is chosen through the Minister of Finance…”. In this respect, specifying a particular investment bank is unfamiliar in Egyptian legislation.

Offering Procedures

Regulation of the offering procedure is provided under the decree, and the process entails the following consecutive stages:

1. The ministerial committee undertakes the decision to offer the shares of a certain company for sale. It determines the stake to be offered, and the timing.

2. Valuation of the shares according to their fair value as per a financial advisor’s report.

3. The review and ratification of fair value by a special committee established by decision of the Minister of Finance, and chaired by a State Council deputy, and including a representative from the Ministry of Finance, Central Audit Agency, Administrative Control Authority, the Central Bank, and the Association of Egyptian Accountants and Auditors, as well as the parent holding company. Meetings of this special committee are to be attended by a representative of the Financial Regulatory Authority.

4. Enforcing the sale.

5. Depositing sale revenue in the seller’s account.

Valuation

The decree specifically lays out the manner for the valuation of shares that will be subject to sale:

1. The upper and lower price range for listed shares that are actively traded will be within 10% (above or below) the average closing price in the month preceding the announcement of the investment bank who will undertake the offering promotion.

2. For unlisted and inactive shares, the offering price will be based on the financial advisor’s report that is reviewed and ratified by the aforementioned [special] committee.

Board Liability

The decree includes new clear regulation of the responsibility of boards of companies whose shares are being offered as well as boards of their parent companies. In this respect, the decree mandates parent companies to undertake all applicable legal procedures for implementing the offering. The goal is to avoid delays by owning companies which would hinder the implementation of the offering. As to companies under offering, the new decree obligates that the boards of these companies ensure the provision and availability of all required company data and information so that these are ready to be reviewed by investment banks and advisors who undertake the offering process.

Conclusion

The new decree tackles the matter of offering of state-owned company shares in a simplified uncomplicated manner. It further repeals several previous decrees that were overlapping and therefore legally vague. On the other hand, the new system does not sufficiently identify the standards for offering the shares of certain companies as opposed to others. Moreover, it does not lay out clear rules for different offering mechanisms, nor does it clarify the way to reconcile the new process with ongoing systems such as those under the Public Enterprise and Public-Sector Companies Laws. Further clarification or legislative intervention may therefore be required to remove potential contradictions between these different systems.   [1] Prime Ministerial Decree No. 926/2018 with new regulations for the government’s program of offering state-owned company shares or expanding the equity structure in said companies, Official Gazette, Issue No. 19 (bis) (c), 14 May 2018.