GAFI and the Stock Exchange Circula

The General Authority for Investment and Free Zones (“GAFI”) has recently issued circular No. 20 of 2019 in association with the Egyptian Stock Exchange (“EGX”) containing rules and definitions regarding rights issue in unlisted joint stock companies and partnerships limited by shares (the “Circular”).[1] Rights issue is a subscription right of existing shareholders to buy additional shares pro rata in the company’s capital increase. Under the Capital Market Law, rights issue confers to existing shareholders two things: the right to subscribe first in any cash capital increase in a non-dilutive manner, and the right to sell this priority right – independently of the share – during the subscription period. The Circular cites GAFI and EGX’s interest in improving the awareness of shareholders in unlisted companies, the protection of minority rights therein, and the avoidance of detriment to shareholders who are unable (or who do not wish) to subscribe in a capital increase and so might prefer to sell the rights issue they own in relation to their shares.

Background

Rights issue is regulated under the Capital Market Law and its Executive Regulations, Article (30) of which was amended in November 2016 making it mandatory for listed companies and those offering their shares to the public to respect a priority right for existing shareholders in buying shares at nominal value at any capital increase.[2] Following that, in December 2016, the Financial Regulatory Authority (“FRA”) issued decision No. 137 of 2016 regulating the trading of rights issue of unlisted companies that have offered their shares to the public (“Decision 137/2016”).[3] Decision 137/2016 provided definitions of rights issue, the company that is to issue shares, the holder of the right (being the shareholders registered at the Central Depository at the time of earning the rights issue), and the date of earning said right. All of the above is without prejudice to the right of the company’s general assembly to decide to suspend priority rights prior to a given capital increase. FRA Decision 137/2016 additionally dealt with matters of the registration of the rights issue with the Central Depository and the trading thereof.

The Joint GAFI – EGX Circular

The new Circular, issued on 13 January 2019 and corrected shortly after, also provides definitions and rules concerning terms such as the issuing company, rights issue and owner, trading system for rights issue, the lapse of the right, and invitation of existing shareholders to subscribe. The “issuing company” is defined as joint stock companies and partnerships limited by shares that have offered their shares to the public as well as those that have not offered their shares to the public and are unlisted. The “owner of the subscription right” is defined in the Circular as every acquirer of the original share prior to the opening of subscription in capital increase, every shareholder in the company who has owned shares prior to the date set for opening subscription, and/or every purchaser of the right from the date of opening subscription to its closing. However, whereas FRA Decision 137/2016 provides that a rights issue lapses if not used by its owner (or acquirer) for subscription in the increase during the original subscription period, the new Circular states that the subscription right lapses if the shareholder does not sell it, or does not subscribe to the increase, within the subscription period in both its first and second rounds. The Circular further states that the invitation for existing shareholders to subscribe in the capital increase determines the subscription period given that the “original subscription period” is defined as round one during which subscription in the increase is applied pro rata, while shareholders may subscribe in the second round of the subscription period without being limited to the percentage of their shareholding.   [1] GAFI Circular in association with the Egyptian Stock Exchange No. 20/2019 on rules regarding rights issue in unlisted companies, dated 13 January 2019. [2] Minister of Investment Decision No. 95/2016 amending certain provisions of the Executive Regulations of the Capital Market Law issued by Minister of Economy and Foreign Trade Decision No. 135/1993, Official Gazette, Issue No. 251, 8 November 2016 [3] FRA Board of Directors Decision No. 137/2016 regulating the rights issue in unlisted joint stock companies and partnerships limited by shares on the Egyptian Stock Exchange, Egyptian Gazette, Issue No. 284, 18 December 2016.