Amendment of Cumulative Voting Rule

The Financial Regulatory Authority (“FRA”) issued two decisions this week amending the requirements concerning cumulative voting and proportional representation in the election of the board of directors of companies with listed securities on the Egyptian Stock Exchange and of companies operating in any non-banking financial activity. The amendments remove the determination of a minimum proportional representation requirement in company bylaws while maintaining the requirement that listed companies and non-banking financial companies (“NBFCs”) provide for cumulative voting when electing board members. This requirement applies to existing companies as well as those wishing to list or obtain a license to practice non-banking financial activities.

Background

As applied by the FRA, cumulative voting is the system of voting for board members wherein each shareholder is given a number of votes equal to the number of shares they hold. A shareholder may then cast all of their votes to one or more candidate, and the voting power is calculated on the basis of the number of shares multiplied by the number of candidates. Meanwhile, proportional representation is a governance principle that allows minority shareholders to have a voice in the selection of board members. In the absence of this mechanism, the owners of 51% of capital in any general assembly will have the final say in the selection of all of the members of the board of directors.

Listed Companies

Published on 28 October 2018, FRA Decision No. 154 of 2018 (“Decision 154/2018”)[1] amends the rules for listing and delisting securities on the Egyptian Stock Exchange, which were passed through the FRA Decision No. 11 of 2014.[2] Among other things, the amendment adds as a requirement for initial listing that the company’s bylaws mandate the use of cumulative voting for the election of board members. The amendment also states that companies should allow for proportional representation “whenever possible.”

Non-Banking Financial Operations

Published on 25 October 2018, FRA Decision No. 155 of 2018 (“Decision 155/2018”)[3] follows a series of other FRA amendments to Decision No. 53 of 2018 (“Decision 53/2018”)[4] that introduced a new, unified regulatory regime for licensing and shareholding in NBFCs. At the time, the Egyptian Gazette simultaneously published Decision 93 of 2018 (“Decision 93/2018”)[5] with Decision 53/2018 to introduce both cumulative voting and minimum proportional representation to Decision 53/2018 as requirements to be incorporated in the bylaws of NBFCs. Decision 93/2018 defined cumulative voting as the system of voting in which shareholders may give their votes, which are equal to the number of their shares, to one board member candidate or divide them among several. It also defined “proportional representation of capital” as ensuring a minimum representation of capital in the membership of the board of directors but within the parameters of one seat only for every 10% of the company’s shares. The actual mechanism by which the 10%-a-seat formula would be implemented was, however, unclear in Decision 93/2018. Whereas the recently issued Decision 155/2018 maintained the definition of cumulative voting and its requirement, it removed the definition of proportional representation and instead allowed the use of proportional representation “whenever possible”. This essentially removes the requirement of minimum proportional representation, as Decision 155/2018 now allows for proportional representation to occur with no minimum requirement or formula to be followed.   [1] FRA Board of Directors Decision No. 154/2018 amending Decision No. 11/2014 on the rules for listing and delisting securities on the Egyptian Stock Exchange, Egyptian Gazette, Issue No. 242, 28 October 2018. [2] FRA Board of Directors Decision No. 11/2014 on the rules for listing and delisting securities on the Egyptian Stock Exchange, Egyptian Gazette, Issue No. 21 (cont.) (a), 28 January 2014. [3] FRA Board of Directors Decision No. 155/2018 amending Decision No. 53/2018 regulating the issuance of licenses to companies undertaking non-banking financial activities and the rules for trading their shares, Egyptian Gazette, Issue No. 240, 25 October 2018. [4] FRA Board of Directors Decision No. 53/2018 regulating the issuance of licenses to companies undertaking non-banking financial activities and the rules for trading their shares, Egyptian Gazette, Issue No. 136 (cont.) (a), 13 June 2018. [5] FRA Board of Directors Decision No. 93/2018 amending Decision No. 53/2018 regulating the issuance of licenses to companies undertaking non-banking financial activities and the rules for trading their shares, Egyptian Gazette, Issue No. 136 (cont.) (a), 13 June 2018.