New Corporate Form for Private Equi

The Minister of Investment and International Cooperation has issued a decision adding Private Equity as a new activity to Capital Market Activities. While private equity was being undertaken previously in the form of holding companies and funds, there were significant complications arising out of the requirement that both holding companies and funds take the form of joint stock companies, a form that is very different from the famous GP-LP structure adopted in all jurisdictions that are attractive for the private equity industry. The breakthrough of this new ministerial decision is that it requires private equity companies to take the form of a company limited by shares, that is the Egyptian form of a GP-LP structure that has been overlooked by the players in the Egyptian capital market so far.

Background

• Private Equity

Prior to the issuance of Minister of Investment and International Cooperation Decision No. 113 of 2018 (the “MIIC Decision”),[1] private equity activities were typically undertaken through a joint stock company, which is the biggest type of company in Egyptian company law and the most typical choice for big businesses seeking a company form that offers all its shareholders limited liability. Such companies are then required to obtain a license from the Financial Regulatory Authority (“FRA”) to undertake venture capital activities, private equity fund activities or investment in new and existing companies (holding companies). The primary issue with using the joint stock company structure in undertaking private equity activities is that it is built on the premise that shareholders manage (through a board of directors) and bear the liability of their own management. The world-famous GP-LP structure that is most commonly used abroad for private equity activities is built on an entirely different premise: that a GP (general partner) manages and takes the liability for management while LPs (limited partners) invest capital, do not interfere in the management, and bear no liability for management. The legislature and the FRA are in constant attempts to try to accommodate the requirements of the private equity corporate structure while at the same time ensuring compliance with international standards for private equity regulation and supervision, although only with regard to private equity funds to the exclusion of venture capital and holding companies. Most notably, private equity funds are required to appoint a licensed fund management company to undertake the management of the fund activities while limiting the role of the shareholders and board to some extent. They are also required to appoint a custodian to ensure the existence and correct valuation of the investments of the fund. Finally, we note that there are two terms used in Egyptian laws and decrees to refer to private equity, the first literally translates into “direct investment” (istithmar mubasher) and the second “private ownership” (al-melkeya al-khassa). The term “private ownership” is more commonly used in the context of investment funds. The second term is the one used by the new MIIC Decision.

• Companies Limited by Shares

Separately, companies limited by shares have – in fact – been formally regulated in Egypt since 1883 as a variation of mixed-liability companies (sharekat al-tawseya; also, a GP-LP structure, the capital of which is divided into quotas and not shares) by virtue of Royal Decree No. 1 issued on the 13^th of November 1883. This form was then regulated separately as a company that is limited by shares (rather than a variation of mixed-liability companies) by virtue of Law No. 26 of 1954 on Joint Stock Companies, Companies Limited by Shares and Limited Liability Companies (repealed) and again by virtue of Law No. 159 of 1981 on Joint Stock Companies, Companies Limited by Shares, Limited Liability Companies, and One-Person Companies (currently in force) (the “Companies Law”). Companies limited by shares are, however, very rarely established as opposed to mixed-liability companies which are more commonly established by small businesses. The following is a brief description of the main features of companies limited by shares (“CLS”):

• They have one or more general partners having no limited liability (“GPs”) and one or more limited partners having limited liability (“LPs”).

• Their capital is divided into one or more quotas owned by the general partner(s) and equal shares owned by the shareholders.

• Management of a CLS is delegated to one or more of the GPs who must be determined in the statutes of the company along with their powers and authorities. GPs are subject to the same rules as those applicable to founders and board members of joint stock companies.

• A CLS has a supervision board (rather than a board of directors) composed of three members. These members could be chosen from among the shareholders or otherwise. The supervision board is entitled to request from the GP(s) accounts for management and is entitled to examine the company’s books and registers for this purpose. The Supervision Board is also entitled to opine on the issues presented to it by the GP(s).

• The shareholders assembly may not take any decision pertaining to the relationship of the company with third parties and may not amend the statutes of the company except after obtaining the approval of the GP(s) unless the statutes provide otherwise.

• Unless otherwise stated in the company’s statutes, the company is terminated upon the death of the GP. If the statutes provide otherwise, then the supervision board may appoint a temporary general partner until the shareholders assembly is convened.

The New Decision

The new MIIC Decision adds “direct investment” (private equity) to the list of capital market activities listed in the CML, which are subject to the incorporation and licensing rules and regulations prescribed in the CML and its executive regulations. This is in accordance with Article (27) of the CML which only lists a few activities and permits the competent minister to add further activities. The MIIC Decision requires the private equity company to take the form of a company limited by shares. This is the first time a financial company is required to take this specific form of company. Previously all financial companies were required to take the form of a joint stock company or a company limited by shares and in some instances (such as in the case of investment funds), the company may only take the form of a joint stock company. The MIIC Decision provides for additional rules to be applicable to private equity companies as follows:

• The minimum capital of the company is required to be 10 million Egyptian pounds. The quota of the general partner must be less than 0.5% of the capital held by the shareholders.

• The capital of the company (excluding the quota held by the GP) must be privately placed to qualified individual and corporate investors as well as financial and non-financial institutions.

• The purpose of the company is stated to be undertaking private equity activities through investment in listed and non-listed securities or in quotas in mixed-liability companies. The purpose of the company may also include venture capital activities.

• The MIIC Decision requires the information memorandum to determine the fields and percentages of investment.

Conclusion

The MIIC Decision is a step ahead in the regulation of private equity in Egypt. However, a number of concerns remain. The first is that although companies limited by shares are the equivalent of the famous GP-LP structure, the form has been around in Egypt for a long period but was hardly ever used, it therefore remains to be seen whether the Egyptian capital market will be able to put it into use after the MIIC Decision. Second, although the purpose of the company includes – for the first time in the history of private equity legislation – the right to invest in quotas of mixed-liability companies, said purpose remains restrictive of potential investment tools that private equity could be interested in. Finally, private equity companies will need to be subjected to further regulation in particular with respect to managing potential conflicts of interest.   [1] Ministry of Investment and International Cooperation Decision No. 113/2018 adding Private Equity as a new activity to Capital Market Activities, Egyptian Gazette, Issue No. 138, 19 June 2018.