Home | | Contact Us

New Requirements for the Splitting

New Requirements for the Splitting of Listed Companies
Much time has passed since the enactment of the Companies Law No. 159 of 1981 in Egypt, which included provisions for the merging of two or more companies. The dissolution of companies, however, has not been adequately addressed under Egyptian Law, and thus companies have tended to sell assets, rights, and obligations as a means of conducting a de facto partition. On September 11th 2014, the Egyptian Financial Supervisory Authority ("EFSA") released its decision stipulating significant changes to the controls and procedures of splitting listed companies (the "Decision").[1] The main provisions of the decision are summarized below.
The Scope
The new rules only apply to listed joint stock companies, and therefore do not apply to other types of companies, or to companies that are not listed. The reason for this is that the scope of EFSA’s jurisdiction does not extend past listed joint stock companies.
The Definition of “Split”
The new Decision defines a split as a "separation of assets or activities, and associated rights and obligations, into two or more separate entities". The Decision explains that such a decision can be either vertical or horizontal. In the case of a horizontal split, resulting companies are owned by the shareholders of the original company and under the same shareholding structure, while in the case of a vertical split the new company is a subsidiary of the original.
The Basic Criteria of the Split
The Decision states that the division of assets and liabilities is undertaken on the basis of the book value of the company, unless otherwise approved by the competent administrative authority. It should be noted that the term "competent administrative authority" refers to EFSA for those companies operating in the field of securities, insurance companies, mortgage companies, while all other joint stock companies which can be listed on the stock exchange are administered by the General Authority for Investment and Free Zones ("GAFI"). In all cases, shareholders' equity in the two companies is determined in accordance with the decision of the Extraordinary General Assembly of the original company.
Procedures
The company's Board must prepare the files for the split, which must include the following:
  1. The reasons for the split;
  2. The manner of the split;
  3. The nominal value of the shares resulting from the split;
  4. The assets and liabilities pertaining to all new companies accompanied by the auditor’s opinion;
  5. “Virtual” financial statements of the original company and the new companies detailing assets and liabilities for the two years prior to partition, accompanied by the auditor's opinion;
  6. Draft Memoranda and Statutes of the original and new companies;
  7. The new position of the listed companies in the stock market and which actions will be taken with regards to the shareholders objecting to the split;
  8. The opinion of the company’s legal counsel;
  9. Any agreements pertaining to the rights of debtors and bondholders.
The Extraordinary General Assembly must approve the split by a majority of not less than 75%.
The Effects of the Split
Following the conclusion of the split procedures, EFSA’s approval must be obtained in order for the company to be authorised to issue new shares and to become registered at both the Central Depository and at the Stock Exchange. New companies must publicly disclose the certified EFSA report. The stock is then traded in accordance with the general rules applicable in the stock market.
Conclusion
The new Decision's main aim is to clarify and facilitate one of the most important measures required in the field of corporate restructuring and capital markets, while making clear that the decision to split a company depends on the will of the shareholders and the disclosure of information without excessive interference from either EFSA or GAFI. Unfortunately, however, this Decision only applies to those companies that are joint stock companies and are listed on the stock exchange, while the majority of companies are in fact unlisted. This deprives a huge number of companies from taking advantage of these new and relatively simple rules. Increased coordination between EFSA and GAFI, in order to ensure that new rules and procedures benefit corporate entities as a whole, should be a main priority.   [1] EFSA's Decision No. 124/2010 stipulating significant changes to the controls and procedures of splitting listed companies, Egyptian Gazette, Issue No. 207, 11 September 2014.
Much time has passed since the enactment of the Companies Law No. 159 of 1981 in Egypt, which included provisions for the merging of two or more companies. The dissolution of companies, however, has not been adequately addressed under Egyptian Law, and thus companies have tended to sell assets, rights, and obligations as a means of conducting a de facto partition. On September 11th 2014, the Egyptian Financial Supervisory Authority ("EFSA") released its decision stipulating significant changes to the controls and procedures of splitting listed companies (the "Decision").[1] The main provisions of the decision are summarized below.
The Scope
The new rules only apply to listed joint stock companies, and therefore do not apply to other types of companies, or to companies that are not listed. The reason for this is that the scope of EFSA’s jurisdiction does not extend past listed joint stock companies.
The Definition of “Split”
The new Decision defines a split as a "separation of assets or activities, and associated rights and obligations, into two or more separate entities". The Decision explains that such a decision can be either vertical or horizontal. In the case of a horizontal split, resulting companies are owned by the shareholders of the original company and under the same shareholding structure, while in the case of a vertical split the new company is a subsidiary of the original.
The Basic Criteria of the Split
The Decision states that the division of assets and liabilities is undertaken on the basis of the book value of the company, unless otherwise approved by the competent administrative authority. It should be noted that the term "competent administrative authority" refers to EFSA for those companies operating in the field of securities, insurance companies, mortgage companies, while all other joint stock companies which can be listed on the stock exchange are administered by the General Authority for Investment and Free Zones ("GAFI"). In all cases, shareholders' equity in the two companies is determined in accordance with the decision of the Extraordinary General Assembly of the original company.
Procedures
The company's Board must prepare the files for the split, which must include the following:
  1. The reasons for the split;
  2. The manner of the split;
  3. The nominal value of the shares resulting from the split;
  4. The assets and liabilities pertaining to all new companies accompanied by the auditor’s opinion;
  5. “Virtual” financial statements of the original company and the new companies detailing assets and liabilities for the two years prior to partition, accompanied by the auditor's opinion;
  6. Draft Memoranda and Statutes of the original and new companies;
  7. The new position of the listed companies in the stock market and which actions will be taken with regards to the shareholders objecting to the split;
  8. The opinion of the company’s legal counsel;
  9. Any agreements pertaining to the rights of debtors and bondholders.
The Extraordinary General Assembly must approve the split by a majority of not less than 75%.
The Effects of the Split
Following the conclusion of the split procedures, EFSA’s approval must be obtained in order for the company to be authorised to issue new shares and to become registered at both the Central Depository and at the Stock Exchange. New companies must publicly disclose the certified EFSA report. The stock is then traded in accordance with the general rules applicable in the stock market.
Conclusion
The new Decision's main aim is to clarify and facilitate one of the most important measures required in the field of corporate restructuring and capital markets, while making clear that the decision to split a company depends on the will of the shareholders and the disclosure of information without excessive interference from either EFSA or GAFI. Unfortunately, however, this Decision only applies to those companies that are joint stock companies and are listed on the stock exchange, while the majority of companies are in fact unlisted. This deprives a huge number of companies from taking advantage of these new and relatively simple rules. Increased coordination between EFSA and GAFI, in order to ensure that new rules and procedures benefit corporate entities as a whole, should be a main priority.   [1] EFSA's Decision No. 124/2010 stipulating significant changes to the controls and procedures of splitting listed companies, Egyptian Gazette, Issue No. 207, 11 September 2014.