EFSA Introduces Important Amendment

The Board of the Egyptian Financial Supervisory Authority (“EFSA”) issued a decision introducing additional exemptions from the obligation to present Mandatory Tender Offers (“MTO”) for those who own more than one third of the company’s capital or right to vote.[1] The decision exempted three cases from the MTO obligation to purchase the minority shares. The first case is where shareholders of the listed companies agreed to put such an exemption into effect. The second case is where the acquisition is made by a State-owned holding company and is taking place on shares owned by the union of workers owning shares in a subsidiary company. Finally, the third case is where the acquisition is taking place indirectly, namely through purchase of more than 50% of the shares of a company that owns 33% of another listed company, but provided that certain conditions are met.

Introduction

The term “Tender Offers” refers to the legal regulation implied in the Executive Regulations of the Capital Market Law (Law No. 95 of 1992). The said regulation holds those wishing to buy above a certain percentage of the shares of a listed company bound to offer all other shareholders the same tender offers, with the same process and conditions. The purpose of the said regulation is to protect the rights of minority shareholders of a listed company, through giving them the chance to sell their shares whenever a substantial change of ownership structure has taken place. Accordingly, a “Mandatory Tender Offer” is an obligation according to which the party wishing to own a significant portion of the shares of a listed company is required to make such MTOs. However, shareholders wishing to continue in the company are under no obligation to sell their shares. Indeed, the said regulation aims at protecting them by giving them the chance to exit the company. The MTO regime was established by an amendment in 2007 to the Executive Regulations of the Capital Market Law. The MTO obligation takes place when a party has bought one third of the capital of the listed company or of the right to vote.

Reason behind the New Amendment

In the last few years, several problems appeared with regard to the MTO regime. Most importantly, there was the “indirect acquisition” problem; namely the case in-which an acquisition has taken place on some or all of the shares of an unlisted company that has a listed subsidiary company. The unlisted company, clearly, does not fall under the MTO regime. This raised a question: if the acquisition of the intermediary unlisted company was above the percentage required by the Capital Market Law, does that give rise to a MTO obligation to purchase the shares of the minority in the listed company? EFSA had to deal with this problem. The new amendment comes in execution of Article 356 (g) of the Executive Regulations of the Capital Market Law, which contains several exemptions of the MTO obligation and gives EFSA the right to add more exemptions.

Exemptions before the Present Decision

Article 356 (g) of the Executive Regulations of the Capital Market establishes that a party is exempt from the MTO obligation, provided that it has secured EFSA’s approval, where the transference of ownership of shares is:

1. part of a disposition of shares between the parents and descents,
2. part of an inheritance, a donation, or a will,
3. a merger,
4. part of a bank sale of pledged shares in order to get the selling bank’s financial rights,
5. part of a process of capital restructuring within affiliated companies,
6. an acquisition by a financial company having licensed to guarantee subscriptions, or
7. is one of the cases determined by EFSA according to the rules and conditions it sets, without prejudice to the rights of minority shareholders.

New Exemptions

The present decision introduces three new cases:

1. If all shareholders of the listed company agreed to exempt the party wishing to purchase the shares from the MTO obligation.
2. Where the acquisition is made by a State-owned holding company and is taking place on shares owned by the union of workers owning shares in a subsidiary company. This special procedure deals with cases where a holding company intervenes to help a workers’ union of a subsidiary company to dispose its shares, without having to make MTO to buy from other shareholders who are not workers in the company. However, it takes place only when the acquisition is happening by the holding company with the purpose of restructuring the capital of the subsidiary company.
3. Where the acquisition is taking place indirectly, namely through purchase of more than 50% of the shares of a company that owns 33% of another listed company. An exemption can take place in this case provided that the following conditions are met: a) the company whose shares are being purchased owns shares in companies other than the listed one, thus its sole purpose is not just to own shares in the listed company; b) the minimum value of shares owned in companies other than the listed one should not be less than 50% of the book value of the company under acquisition; c)the buyer is not an owner of direct shares in the listed company.

It is noteworthy in the three above cases that the exemption is not automatic but has to be approved by EFSA. In our opinion, the new EFSA decision is a positive development and should be welcomed by the capital market and those who work in it, since it clears ambiguities and provides for the transparency required for one of the most important aspects of market transactions. [1] EFSA Board of Directors' Decision No. 54/2016 on Exemptions from Mandatory Tender Offers According to Article 356 (g) of the Executive Regulations of the Capital Market Law, EFSA's website, available through this link (Arabic).