GAFI Issues Several Circulars with

The General Authority for Investment and Free Zones (“GAFI”) recently published on its website a number of circulars with governance rules for companies following the amendments of the Companies Law and its executive regulations earlier this year. The circulars – with dates ranging between October and November 2018 – include a reiteration, and sometimes clarification, of the rules on the term of the board of directors, convening of board meetings by phone or teleconference, cumulative voting for the election of board members, proportional representation on the board, a definition for independent directors, and the issuance of preferred shares.

Background

On 16 January 2018, the Official Gazette published Law No. 4 of 2018 (“Law 4/2018”)[1] amending certain provisions of the almost-four-decade-old Companies Law No. 159 of 1981 (the “Companies Law”). Representing the most significant change to the Companies Law since its enactment in the early 1980s, Law 4/2018 included the addition of a new legal form of companies called the “one-person company” as well as the revision of the rules concerning company establishment, shareholder agreements, preferred shares, treasury shares, and in-kind contributions to capital. Following that, on 11 February 2018, the Egyptian Gazette published Ministry of Investment Decision No. 16 of 2018 (“Decision 16/2018”)[2] amending the executive regulations of the Companies Law (the “Executive Regulations” or “ER”), to align with the amendments introduced through Law 4/2018. Minister of Investment Decision No. 16 of 2018 modified certain rules and procedures governing ordinary and extraordinary general assembly meetings, the election of board members, financial statement disclosure, and access to company records and information. Both Law 4/2018 and Decision 16/2018 were covered in the Egypt Legal Update issues of January 2018, Week 4 and February 2018, Week 3 respectively.

Circular No. 5 of 2018: Board of Directors Term[3]

Article (77) of the Companies Law states that the term of the board of directors for joint stock companies may not exceed three years (except the first board after establishment, which could be appointed for a term of five years). The Executive Regulations provides the manner of calculating the end of the term. The term is calculated from the date of the company’s registration, or from the date of the shareholder’s decision to appoint the board members. It ends with the conclusion of the first shareholder’s general assembly meeting that is held to review the financial statements for the fiscal year which witnesses the end of the three (/five) year period. A board member’s term that is ending may be renewed for a similar term once, unless the company’s articles of association provide otherwise. GAFI Circular No. 5 of 2018 refers to the authority’s observation that some companies do not respect the stated limit on the term of board of directors, and reiterates the rules in the Law and the ER in this respect. It adds that in the event that the term of a board of directors ends without renewal from the shareholders or the election of a board to replace it, the old board is considered an “acting” board that may not take material or high impact decisions such as capital increases, or decisions that could be detrimental to some or all of the shareholders.

Circular No. 4 of 2018: Board Meeting by Phone or Audio-Visual Communication[4]

The Companies Law allows board meetings to be held through modern telecommunication methods. The Circular reiterates that for the board to be able to convene through telephone or video calls, such as video conference calls, this must be provided as an option in the company’s by-laws. The Circular further requires companies that do undertake modern communication systems for convening board meetings to take all necessary measures to ensure the safety and security of the methods used for participation in board meetings. A record of the deliberations and decisions of the meetings must be subsequently kept in the registry prepared for that purpose and a record of the meeting proceedings must also be stored on a CD that is kept in the headquarters. Records of the meetings’ attendance must be signed by the attendees who were physically present. In case of participation through ICT methods, the phrase “attended via phone call or video” must be noted in front of said attendee names, and both the company secretary and chairman must sign the attendance records after verifying the identities of said attendees. The meeting minutes must also include a confirmation of all attendees, whether they were physically present or participated through ICT methods.

Circular No. 1 of 2018: Cumulative Voting for the Election of Board Members[5]

The amendment of the Companies Law introduced cumulative voting as a means for the election of board members which could be provided for in the company’s articles of association. Cumulative voting is way to mitigate the situation where a majority of shareholders control the choice of board members, taking advantage of the fact that voting for each board member is performed separately which means that a majority shareholder can appoint all of the members of the board of directors with no representation of minority shareholders. Cumulative voting thus allows companies to make use of this voting system, which grants every shareholder a number of votes that are equal to the number of shares they own, and deducts from the shareholder’s voting capacity with every vote they give to a candidate, so that the end result is a relative representation of the general assembly. This system ensures some fair representation on the board of directors, and offers better protection to the rights of minority shareholders. GAFI Circular No. 1 of 2018 stresses that cumulative voting is an optional system, as per Article (73) of the Companies Law. For a company to be able to use the cumulative voting system, such must be provided in its articles of association. Cumulative voting is only to be applied for the election of board members, with the exclusion of any other items on the board meeting agenda, and the vote counters must record the voting percentage and the manner in which it was undertaken in the board meeting minutes. It is not immediately understandable why the method of cumulative voting is restricted to election of the board members. Since whether or not to use cumulative voting was left optional to companies - as long as such is provided for in the articles of association - limiting the use of said voting method to the election of board members does not seem to be justified. It is worth contrasting the above with the rule for companies that are listed on the Egyptian Stock Exchange, and those operating in the field of non-banking financial services – both regulated by the Financial Regulatory Authority (“FRA”) – with respect to cumulative voting for the election of board members. Recent regulations issued by the FRA mandate that listed companies, and non-banking financial services companies provide for the use of cumulative voting for the election of board members in their by-laws, while allowing for proportional representation on the board “whenever possible”.

Circular No. 3 of 2018: Proportional Representation on the Board[6]

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 members of the board of directors. After amendment, the Companies Law now provides for the optional referral to a proportional representation system in the company’s bylaws. GAFI Circular No. 3 of 2018 reiterates GAFI’s interest in the protection of minority rights and ensuring the representation of minority shareholders and their participation in the company’s decision-making process. The Circular clarifies what is meant by proportional representation as the guaranteeing that a minimum of capital is represented on the board of directors so that there is a seat for every 10% of capital. The rule of having one seat for every 10% of capital finds its origin in the executive regulations of the Companies Law.

Circular No. 2 of 2018: Definition of Independent Director[7]

In this Circular GAFI defines “independent board of director member” as follows: a non-executive member who is not a shareholder in the company, and his/her relationship with it is limited to being a member of the board of directors. Said member does not represent the shareholders and has no material transactions with the company, nor does he/she receive payment or commission other than remuneration for being on the board. He/she has no special interest with the company and is not a close relative of any of the shareholders, board members, or executive managers, nor has he/she been a high-ranking employee of the company, consultant, or auditor for three years. An independent director’s term on the board may not exceed six consecutive years, or he/she is not considered independent. He/she must have appropriate experience, must be able to dedicate enough time to the company, must be free of any conflicts of interest, and may not be re-appointed except after the lapse of three years from the end of his/her term.

Circular No. 13 of 2018: Access to Information on Related Party Transactions[8]

The amended Companies Law gave shareholders or partners holding at least 10% of the company’s shares the right to obtain information and copies of documents related to related party contracts or transactions. In case the company refuses such disclosure, said shareholders or partners could request such access from GAFI, whose decision would be binding to the company. For its part, the amended executive regulations reiterated this without fleshing it out. GAFI Circular No. 13 of 2018 outlines the details of this procedure. First, the shareholders or partners holding at least 10% of capital have the right to request the information or copies of documents on related party contracts/transactions from company management, and the request is to be made either through a notice or a certified mailed letter with proof of delivery. The company then has 15 days from the date of request. If the company refuses or fails to grant access, a request of access is made to GAFI after the 15-day period, which is to include proof that the applicant(s) own 10% of shares (either a certificate from the custodian or auditor, or an official copy of the last shareholding structure) as well as proof that a request of access was made to the company. GAFI would then issue a binding decision allowing access and the company must comply within 15 working days from the decision’s date. In case of the company’s violation of the decision, a statement is issued to the applicant noting the company’s failure to implement the decision, with the possibility of the imposition of a penalty ranging between EGP 2,000 and 10,000 against the perpetrators (as per the provisions of the Law).

Circular No. 11 of 2018: Electronic Voting in General Assembly Meetings[9]

In general, companies are allowed to use the means for presenting and voting on general assembly meetings that are determined in their by-laws. The amendment to the Companies Law provided that joint stock companies listed on the central depository system are allowed to use electronic means to present the agenda in a general assembly meeting and vote on its items. GAFI’s Circular states that the use of electronic means for said companies is optional, as long as the exact text of Article (73)3 of the Companies Law is stipulated in the company’s by-laws, and the ‘electronic means’ to be used is left open without specification of a certain method. The means used must be ratified by GAFI. The electronic voting method that is used must allow the participant to express their opinion on agenda items without having to be present in the meeting, and that is for a period of at least five days prior to the date of the meeting. At the end of that period, the company must prepare a final record with the outcome of remote voting which must be presented at the general assembly so that they are taken into account in the final vote. A shareholder who has voted remotely has the right to attend the meeting and change their vote. Finally, the Circular clarifies that the use of an electronic system to present and vote on general assembly items is not the same as convening the meeting at a different location or by tele- or audio-visual communications means. It is merely a manner of presenting agenda items and allowing shareholders to review and vote on them remotely within the five days prior to the convening of the general assembly meeting.

Circular No. 14 of 2018: Preferred Shares[10]

Preferred shares are those that have – according to the company’s by-laws – certain voting, profit, or liquidation privileges, given that a preferred share may not carry both voting and liquidation privileges. Prior to the amendment of the Companies Law, a company was not allowed to issue preferred shares unless its by-laws contained a provision allowing that at incorporation. The amendment allowed 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. The Circular adds a provision that sets a limit to the voting privileges of preferred shares at a maximum of two votes per share unless an extraordinary general assembly approves otherwise through three-quarters of the company’s capital.   [1] Law No. 4/2018 amending certain provisions of the Companies Law No. 159/1981, Official Gazette, Issue No. 2 (bis) (t), 16 January 2018. [2] Ministry of Investment and International Cooperation 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. [3] GAFI Circular No. 5/2018 dated 29 October 2018 with regulations on board of directors’ term. [4] GAFI Circular No. 4/2018 dated 17 October 2018 with regulations on participating in corporate board meetings through telephone or video calls. [5] GAFI Circular No. 1/2018 dated 16 October 2018 with regulations on cumulative voting for the election of board members. [6] GAFI Circular No. 3/2018 dated 16 October 2018 with regulations on proportional representation on the board of directors. [7] GAFI Circular No. 2/2018 dated 16 October 2018 with the definition of independent board of director member. [8] GAFI Circular No. 13/2018 dated 19 November 2018 with regulations on accessing information on related party transactions. [9] GAFI Circular No. 11/2018 dated 10 November 2018 with regulations on electronic voting in general assembly meetings. [10] GAFI Circular No. 14/2018 dated 19 November 2018 with regulations on the issuance of preferred shares.