Legal Update April 2018 – New Amendments to the Companies Law
Law no. 4/2018 was published in the Official Gazette on 16 January 2018 amending a number of important provisions (the “Amendments”) of the Egyptian Companies Law no. 159/1981 (the “Companies Law”). Furthermore, the Executive Regulations of the Companies Law were amended by the Ministry of Investment and International Cooperation Decree no. 16/ 2018 to reflect such Amendments. We set out below a summary of the key amendments introduced:
Dematerializing shares and voting in General Assembly meetings
Whilst dematerialization of shares of a joint stock company has been possible for a number of years there has been no requirement to do so until now. However, any new joint stock company must now have dematerialized shares and the founders must submit a certificate from Misr for Central Clearing, Depository and Registry (MCDR) evidencing such dematerialization. Furthermore, existing joint stock companies are required to dematerialize their shares within a one-year period ending on 14 January 2019.
Upon dematerializing its shares, a company may use any electronic method in discussing and voting by the shareholders on the decisions of the General Assembly meetings. The use of such electronic voting and discussion system and the approach of the General Authority for Investments and Free Zones (“GAFI”) in this regard are yet to be tested in practice but should mean that physical attendance will no longer be required which will be a welcome development to foreign investors in particular.
Attendance in shareholder meetings
The Amendments now allow individual shareholders in joint stock companies to delegate non-shareholders in attending General Assembly meetings via a power of attorney or a signed proxy. Previously the delegation had to be to a shareholder. However, it is to be noted that quota-holders in limited liability companies may only delegate other quota-holders in attending the General Assembly meetings.
Regulating agreements between shareholders
The Amendments have recognized shareholder agreements or either joint stock or limited liability companies for the first time, whether concluded upon incorporation or later. They further stipulate that they shall be enforceable vis-à-vis the shareholders who are not parties thereto provided that they are approved in an EGA with a majority of at least three quarters of the company’s capital. A higher majority is required in the event the shareholders’ agreement (i) provides for preferences in voting, profits or liquidation proceeds; (ii) is considered a related party agreement; or (iii) puts restrictions on the management of the company or dealing in its shares. However, the Amendments do not quantify such higher majority.
Although shareholders’ agreements were very common in practice before the Amendments, they were not binding against non-signing shareholders. Furthermore, the breach of such agreements was only remedied by a compensation claim. Specific performance was not available, specifically to enforce a corporate action required by such agreements. Now theoretically, specific performance may be available. It is yet to be seen how GAFI will approach this in practice.
The Amendments have granted the ordinary general assembly (“OGA”) of joint stock companies the authority to increase the issued capital within the limits of the authorized capital by the simple majority vote of the shares represented in the meeting. Thus, now both board of directors and the OGA have specifically been granted such authority. The Extraordinary General Assembly meeting (“EGA”) remains the exclusive authority regarding increasing the authorized capital.
Previously a company could not issue preference shares unless its articles of association upon incorporation provided for the terms and conditions of such issuance. Thus, in practice the issuance of preference shares was relatively limited. The legislator has now allowed the amendment of the articles of association at any time during the lifetime of the company to include the issuance of preference shares.
Preference shares can grant to their holders preferences in voting, profits or liquidation proceeds. However, the Amendments stipulate that a preference share may not grant a preference in both liquidation proceeds and voting.
A new restriction on the issuance of treasury shares was added by the Amendments whereby the company may not own more than 10% of its capital. The Amendments have retained the original one-year limit on the holding of treasury shares, during which period the company must dispose of the treasury shares or reduce its capital by their nominal value. As per the Amendments, disposal to subsidiaries or related parties does not satisfy the disposal requirement. The Executive Regulations have defined “Subsidiaries” as those companies in which the company holds more than 50% of their capital or voting rights. Furthermore, “related parties” are defined as the parties that are subject to the actual control of the company or with which the company has an arrangement regarding voting in their shareholders or board of directors’ meeting as well as the parties in which the company owns a percentage of shares or voting rights that allows it to have effective influence on their decisions.
Fostering minority rights
The Amendments grant GAFI, upon the request of shareholders owning at least 5% of the company’s capital, the right to suspend any resolution issued by the General Assembly to the detriment of such shareholders or for the benefit of specific category of shareholders or to bring about a private benefit for the board of directors or others. A lawsuit must be filed by the concerned parties within 30 days from the suspension decision otherwise the suspension decisions will be considered as they have never existed. Such administrative suspension was not available before the Amendments as the shareholders could only resort to the courts to suspend any General Assembly resolution.
Additionally, the Amendments now allow the articles of association of a joint stock company to provide for a minimum representation of the company’s capital in the membership of the board of directors provided that each 10% of the capital gets a maximum of one seat in the board. Whilst these rules were implemented in practice by GAFI providing for formal regulation gives more assurance as it protects against any change in GAFI’s internal practice.
One further information right has been granted to minority shareholders in that shareholders owning at least 10% of the company’s capital have the right to obtain the information and documents related to related party agreements or transactions concluded between the company or any party related thereto. If the company refuses to provide such documents, such shareholders will have the right to submit a request to GAFI and the decision of the latter shall be enforceable and binding on the company.
GAFI’s Authority to object to capital increase
The Amendments grant GAFI the discretionary authority to object to a capital increase even after it has been ratified and reflected in a company’s entry on the Commercial Register. GAFI’s authority in this regard is limited to specific cases including fraud, prejudicing the rights of shareholders or third parties, violation of Egyptian accounting standards and violation of material provisions of the law. GAFI’s objection will be annotated in the Commercial Register and the company may object within 15 days otherwise the capital increase will be cancelled from the commercial register.
Board of directors’ meetings
Before the Amendments, board meetings could virtually convene if the articles of association so permitted; however, the minutes of the meeting had to be physically circulated and signed by each board members. Now, a board of directors meeting may convene via new methods of technical communication including electronic signature or any other automated or electronic means of voting as approved by GAFI. Thus, theoretically, board meeting minutes do not need to be physically circulated and signed by the board members. Again, it is yet to be seen how GAFI will approach this in practice given the requirement to obtain GAFI ratification on board minutes.
Penalties for violating the law
Violating the mandatory provisions of the Companies Law is sanctioned by invalidity; however, now the courts may grant a grace period of up to six months to rectify the invalidity, if possible. Previously there was no such grace period. Furthermore, the limitation period for filing an invalidity lawsuit is increased from one to three years from the date the concerned parties become aware of the violating decision.
The Amendments have introduced the concept of “cumulative voting” for the first time in electing members of the board of directors. The articles of association of the company may provide for “cumulative voting” whereby each shareholder is granted a number of votes that equals the number of his shares and may divide such vote amongst more than one nominee.
The Amendments regulate the split of companies into two or more entities in the form of a joint stock company, a limited liability company or a company limited by shares. The companies resulting from the split shall be the successors of the split company subject to statuary subrogation provisions.
The split is horizontal if the companies resulting from the split are owned by the same shareholders of the split company with the same percentage of ownership. The split is vertical if it includes separating part of the split company’s assets into an owned subsidiary.
Obtaining the operating license is now an incorporation condition
The founders of a company to be incorporated to undertake any of the activities that require special approvals by other laws must obtain such approvals and submit them among the incorporation documents of the company. Previously licensing occurred after incorporation.
Single Person Companies
The Amendments introduce single person companies for the first time in the Egyptian law. With few exceptions granted to public law persons, the essence of companies in Egypt was based on the partnership of two or more partners. Now, a single natural or juristic person may establish a single person company. Single person companies are limited liabilities companies subject to the rules governing the latter unless otherwise stipulated in the law. However, the Amendments provide for certain cases where the corporate veil of such a company can be pierced, and for the founder of the single person company to become liable for the company’s liabilities. Such cases include liquidating the company in bad faith and the failure to separate between the founder’s financials and the financials of the company.