The Amendment of the Executive Regu
The Amendment of the Executive Regulations of the Capital Market Law to Tighten Supervision
- Clarifying the procedures of the capital increase through the conversion of bonds and debt instruments into shares.
The Decision added Article 17 (bis) to the Executive Regulations of the Capital Market Law, which regulates the capital increase through the conversion of bonds or other debt instruments or securities into shares. The amendments stipulate that the Extraordinary General Assembly resolution which approves the issuance of the bonds, debt instruments or other convertible securities must include the conversion factor to be used at the time of conversion or the formula according to which such factor shall be determined according to the valuation prepared by the company in this regard. Such determination and the valuation of the shares, at the time of the conversion of the securities into shares, shall not be subject to the rules on the valuation of the shares applicable to capital increase as set out in the Executive Regulations.
Article 51 of the Companies Law No. 159 of 1981 provides for the possibility of issuing convertible bonds into shares provided that the prospectus of the bonds shall include the term at which the bonds may be converted, without prejudice to the rules applicable to the capital increase. However, the conversion of bonds and other convertible instruments into shares was not a common practice in the Egyptian capital market.
It is worth mentioning that the Capital Market Law referred to the articles in the Executive Regulations of the Companies Law concerning bond issuance and financing instruments.
| The resolution of the general shareholders meeting approving the issuance of bonds, debt instruments or other convertible securities must include the conversion factor or the formula for the determination of the conversion factor. |
Thus, the Executive Regulations through this Decision addressed an important point which is the method of determining the value of shares in the case of conversion of bonds, debt instruments and other securities into shares.
We believe that this amendment may likely encourage the issuance of bonds and other debt instruments - including Islamic bonds - which will diversify the sources of finance for companies and stimulate the economy in general.
- Tightening the supervision and control over market players
The amendments as set out in Decree No. 45 of 2015 oblige securities brokerage and portfolio management companies to obtain detailed information on each client and to keep the information and documents obtained as well as the record of the securities traded on behalf of their clients and their contracts with the clients and their account statements for a period of five years (as opposed to two years according to the Executive Regulations before the recent amendment) from the date of the most recent trading transaction or the date of closing their accounts.
The Decision further allows companies to keep their records and documentation in electronic form or as microfilms instead of the originals. Said electronic or microfilm copies shall have evidentiary value which demonstrates a new tendency in Egyptian legislation leaning towards keeping up with technological development whether in Egypt or abroad.
| Securities brokerage and portfolio management companies may keep records in electronic form or as microfilms. |
The Decision also introduced an obligation on securities brokerage and portfolio management companies, in case dealing with foreign financial institutions working in the fields of brokerage or asset management, to ensure that (1) such foreign financial institutions are in possession of the identification documents of the beneficiary owners that they represent; (2) they have proxies from the beneficiary owners; (3) they comply with anti-money laundry regulations; (4) they are obliged to provide EFSA with the documentation of any client as EFSA may request; and (5) they keep record of the documents for a period of five years.
This amendment aims at combating money laundry and enforcing a stricter supervision on suspicious funds to prevent them from dealing in the Egyptian market. The central depository and registry law No. 93 of 2000 had regulated the obligations of companies carrying out activities in Egypt and acting as registered owners. However, this amendment to the executive regulations of the Capital Market Law has made this an obligation on Egyptian companies as well - dealing with foreign financial institutions – which is likely to guarantee a more efficient enforcement of said rules.
- The applicability of preemptive rights of existing shareholders in case of private placements
The Decision also dealt with the case of the increase of the issued capital of a company by means of offering the increase shares or a portion thereof in a private placement. The Decree provided for the introduction of two new paragraphs to Article 32 of the Executive Regulations of the Capital Market Law dealing with the offering of the capital increase shares in a public offering. As amended, the Executive Regulations now allow for the capital increase shares to be offered in a private placement without offering such shares – in a first round - to existing shareholders even if such preemptive rights are provided for in the company’s articles of association (which has usually been the case for joint stock companies), whether it is a cash capital increase or an debt-equity conversion.
Before the present amendment, in cases of cash capital increases, the company had to offer the increase shares to the existing shareholders, unless explicitly exempted by the law as in the case of public offering (as is provided in Article 32 of the Executive Regulations) and provided the extraordinary general shareholders meeting approves such bypassing of the preemptive rights of existing shareholders.
| Capital increase shares may be offered in a private placement without offering such shares – in a first round - to existing shareholders even if such preemptive rights are provided for in the company’s articles of association. |
The latest Decision therefore included the regulation of private placements given that before the amendment, the Executive Regulations were silent on the possibility to bypass existing shareholders’ preemptive rights in cases of private placements.
Furthermore, the Decision also introduced a minority protection mechanism by stipulating that all the existing shareholders must approve the waiver of the right to subscribe to the increase shares as a condition for the private placement. Otherwise, the extraordinary general shareholders’ meeting may decide on such waiver on the condition that the shares of the entities benefiting from the private placement and their related parties, if any, do not have a vote. The term “related party” has also been defined by the amendment by quoting the definition provided in Chapter XII of the Executive Regulations (concerning Mandatory Tender Offers) and by adding to such definition that related parties shall also include those persons who have voting agreements at the company’s general shareholders’ meetings or board meetings.
We believe this amendment may result in an easier and swifter entry by new shareholders into companies which may support companies both technically and financially to further companies’ performance and boost the economy in general. Conclusion The Decision dealt with a number of important issues that aim at incentivizing financing companies whether through the issuance of debt instruments or through the entry by new shareholders into existing companies. The Decree also provides for stricter surveillance on suspicious funds. We welcome the above amendments, yet we would have preferred for the definition of the term “related parties” to be a universal definition applicable to the entire executive regulations for purposes of the application of the Capital Market Law rather than having a number of definitions for the same term in different places in the Executive Regulations. [1] Minister of Investment's Decision No. 45/2015 amending some provisions of the Executive Regulations of the Capital Market Law, Official Gazette, Issue No. 105, 9 May 2015.- Clarifying the procedures of the capital increase through the conversion of bonds and debt instruments into shares.
The Decision added Article 17 (bis) to the Executive Regulations of the Capital Market Law, which regulates the capital increase through the conversion of bonds or other debt instruments or securities into shares. The amendments stipulate that the Extraordinary General Assembly resolution which approves the issuance of the bonds, debt instruments or other convertible securities must include the conversion factor to be used at the time of conversion or the formula according to which such factor shall be determined according to the valuation prepared by the company in this regard. Such determination and the valuation of the shares, at the time of the conversion of the securities into shares, shall not be subject to the rules on the valuation of the shares applicable to capital increase as set out in the Executive Regulations.
Article 51 of the Companies Law No. 159 of 1981 provides for the possibility of issuing convertible bonds into shares provided that the prospectus of the bonds shall include the term at which the bonds may be converted, without prejudice to the rules applicable to the capital increase. However, the conversion of bonds and other convertible instruments into shares was not a common practice in the Egyptian capital market.
It is worth mentioning that the Capital Market Law referred to the articles in the Executive Regulations of the Companies Law concerning bond issuance and financing instruments.
| The resolution of the general shareholders meeting approving the issuance of bonds, debt instruments or other convertible securities must include the conversion factor or the formula for the determination of the conversion factor. |
Thus, the Executive Regulations through this Decision addressed an important point which is the method of determining the value of shares in the case of conversion of bonds, debt instruments and other securities into shares.
We believe that this amendment may likely encourage the issuance of bonds and other debt instruments - including Islamic bonds - which will diversify the sources of finance for companies and stimulate the economy in general.
- Tightening the supervision and control over market players
The amendments as set out in Decree No. 45 of 2015 oblige securities brokerage and portfolio management companies to obtain detailed information on each client and to keep the information and documents obtained as well as the record of the securities traded on behalf of their clients and their contracts with the clients and their account statements for a period of five years (as opposed to two years according to the Executive Regulations before the recent amendment) from the date of the most recent trading transaction or the date of closing their accounts.
The Decision further allows companies to keep their records and documentation in electronic form or as microfilms instead of the originals. Said electronic or microfilm copies shall have evidentiary value which demonstrates a new tendency in Egyptian legislation leaning towards keeping up with technological development whether in Egypt or abroad.
| Securities brokerage and portfolio management companies may keep records in electronic form or as microfilms. |
The Decision also introduced an obligation on securities brokerage and portfolio management companies, in case dealing with foreign financial institutions working in the fields of brokerage or asset management, to ensure that (1) such foreign financial institutions are in possession of the identification documents of the beneficiary owners that they represent; (2) they have proxies from the beneficiary owners; (3) they comply with anti-money laundry regulations; (4) they are obliged to provide EFSA with the documentation of any client as EFSA may request; and (5) they keep record of the documents for a period of five years.
This amendment aims at combating money laundry and enforcing a stricter supervision on suspicious funds to prevent them from dealing in the Egyptian market. The central depository and registry law No. 93 of 2000 had regulated the obligations of companies carrying out activities in Egypt and acting as registered owners. However, this amendment to the executive regulations of the Capital Market Law has made this an obligation on Egyptian companies as well - dealing with foreign financial institutions – which is likely to guarantee a more efficient enforcement of said rules.
- The applicability of preemptive rights of existing shareholders in case of private placements
The Decision also dealt with the case of the increase of the issued capital of a company by means of offering the increase shares or a portion thereof in a private placement. The Decree provided for the introduction of two new paragraphs to Article 32 of the Executive Regulations of the Capital Market Law dealing with the offering of the capital increase shares in a public offering. As amended, the Executive Regulations now allow for the capital increase shares to be offered in a private placement without offering such shares – in a first round - to existing shareholders even if such preemptive rights are provided for in the company’s articles of association (which has usually been the case for joint stock companies), whether it is a cash capital increase or an debt-equity conversion.
Before the present amendment, in cases of cash capital increases, the company had to offer the increase shares to the existing shareholders, unless explicitly exempted by the law as in the case of public offering (as is provided in Article 32 of the Executive Regulations) and provided the extraordinary general shareholders meeting approves such bypassing of the preemptive rights of existing shareholders.
| Capital increase shares may be offered in a private placement without offering such shares – in a first round - to existing shareholders even if such preemptive rights are provided for in the company’s articles of association. |
The latest Decision therefore included the regulation of private placements given that before the amendment, the Executive Regulations were silent on the possibility to bypass existing shareholders’ preemptive rights in cases of private placements.
Furthermore, the Decision also introduced a minority protection mechanism by stipulating that all the existing shareholders must approve the waiver of the right to subscribe to the increase shares as a condition for the private placement. Otherwise, the extraordinary general shareholders’ meeting may decide on such waiver on the condition that the shares of the entities benefiting from the private placement and their related parties, if any, do not have a vote. The term “related party” has also been defined by the amendment by quoting the definition provided in Chapter XII of the Executive Regulations (concerning Mandatory Tender Offers) and by adding to such definition that related parties shall also include those persons who have voting agreements at the company’s general shareholders’ meetings or board meetings.
We believe this amendment may result in an easier and swifter entry by new shareholders into companies which may support companies both technically and financially to further companies’ performance and boost the economy in general. Conclusion The Decision dealt with a number of important issues that aim at incentivizing financing companies whether through the issuance of debt instruments or through the entry by new shareholders into existing companies. The Decree also provides for stricter surveillance on suspicious funds. We welcome the above amendments, yet we would have preferred for the definition of the term “related parties” to be a universal definition applicable to the entire executive regulations for purposes of the application of the Capital Market Law rather than having a number of definitions for the same term in different places in the Executive Regulations. [1] Minister of Investment's Decision No. 45/2015 amending some provisions of the Executive Regulations of the Capital Market Law, Official Gazette, Issue No. 105, 9 May 2015.