GAFI Publishes Corporate Governance

Amidst growing activity in governance-related regulations by different authorities in Egypt, the General Authority for Investments and Free Zones (“GAFI”) issued a couple of publications on its website since the beginning of this year with various governance rules. These include: (1) Circular No. 21 of 2019, which mainly presents rules for boards of directors of companies operating under the Investment Law and the Companies Law (the “Circular”);[1] and (2) the Legislative and Regulatory Framework for the Protection of the Rights of Minority Shareholders in Egypt (“Framework”).[2] In accordance with the Circular, GAFI oversees the implementation of corporate governance rules in GAFI-supervised companies and violating companies have a month at most from the date of notification of the violation, unless otherwise decided, to rectify.

Background

Corporate governance is the set of rules, systems, and processes by which companies are directed and controlled, guaranteeing a balance between the interests of a company's shareholders, management, and other stakeholders. Corporate governance started gaining ground in Egypt in the twenty first century: the Arabic expression hawkamat al-sharikat (حوكمة الشركات) appeared during the early 2000,[3] and the first assessment of corporate governance in Egypt (and the Arab region) was conducted by the World Bank and the International Monetary Fund in 2001.[4] In 2005, a Code of Corporate Governance was issued by the Egyptian Institute of Directors, which operates under the Financial Regulatory Authority, and it has been updated since.

GAFI’s Circular and Framework

In January 2019 and following its previous governance-related decisions and circulars last year, GAFI issued Circular No. 21 of 2019 and the Framework with the stated aims of clarifying to investors and companies the rules in the relevant legal frameworks (whether the Companies Law or the Investment Law), encouraging investments by building investor confidence, strengthening the protection of minority investors and shareholders, and being conducive to more stable company management and economy. In light of this, GAFI cites international standards and practices of corporate governance, including the Organization for Economic Cooperation and Development’s (“OECD”) six principles of corporate governance and the World Bank’s Doing Business index. The Circular mainly deals with regulations pertaining to the board of directors, including its constitution, the scope of its work and activities, the obligations of its members, and the formation and functioning of its committees that are task-based and temporary and which are formed to facilitate the functioning of the board itself (such as review committees, risk management committees, and governance committees). It also touches on regulations regarding general assemblies, disclosure to GAFI, accountability, and auditing. Most importantly, although it appears to be guiding in its nature, the Circular outlines GAFI’s positions on certain matters and it highlights GAFI’s role in overseeing the sound implementation of governance rules in companies under its supervision. Thus, the Circular should be taken into account by relevant stakeholders. As for the Framework, which GAFI published in both Arabic and English, it mostly relates to rules aimed at enhancing the protection of minority shareholders, including the linguistic and legal definitions of minority shareholders; the different rights and responsibilities of shareholders during and after company establishment, such as during general assembly meetings and voluntary liquidation; cumulative voting mechanisms; GAFI’s role in the protection of minority shareholders (including, but not limited to, mechanisms of petitions and inspection); and dispute resolution through the Investors Disputes Settlement Center. Most of the rules listed in the Framework clarify and reiterate provisions in the Companies Law but also to a lesser extent provisions in the Capital Market Law and GAFI circulars and decisions.

Conclusion

Given that there is a variety of national legislative sources on which corporate governance standards in Egypt are based – particularly the Companies Law, the Capital Market Law, the Central Depository Law, and the Banking Law in addition to executive regulations and decisions – it proves helpful to string together the relevant rules and processes in one place.[5] However, as much as these guides which focus on specific aspects of corporate governance (such as board practices or shareholder rights) are useful, a step further towards a more rigorous and thorough system of corporate governance would be to develop comprehensive guides, in terms of both content and form. In addition, the preparation and dissemination of one comprehensive publication that includes the different areas of corporate governance (such as the rights and equitable treatment of shareholders; disclosure and transparency; board structure and functioning; management; internal control; ethics and conflict of interest; stakeholders and institutions; accountability; and predictability) as well as the enforcement mechanisms (including sanctions) in lieu of the multiple guides or frameworks that are topic-specific could help promote these principles particularly since there could be areas of overlap. Alternatively, comprehensive governance guides for different forms of companies could be issued, such as separate corporate governance guides for joint stock companies, limited liability companies, partnerships limited by shares, and one-person companies according to the regulatory level that they are subject to.   [1] GAFI Circular No. 21/2019 on the basic guiding governance principles for companies operating under the Investment Law No. 72/2017 and the Companies Law No. 159/1981, available through this link (in Arabic). [2] GAFI, “The Legislative and Regulatory Framework for the Protection of the Rights of Minority Shareholders in Egypt”, available through this link. [3] “Corporate Governance Reform in Egypt: Achievements and Challenges Ahead”, M. Karim Sorour, Corporate Governance: An International Perspective (edited by S. O. Idowu and K. T. Çaliyurt). [4] The American University in Cairo, “Corporate Governance: Are We on the Right Track?”, Nermeen Shehata, available through this link. [5] European Bank for Reconstruction and Development, “Corporate Governance in Transition Economies: Egypt Country Report”, December 2017, available through this link; Global Corporate Governance Forum, “Toolkit 2: Developing Corporate Governance Codes of Best Practice, User Guide”, 2005, available through this link.