Omar S Bassiouny and Muhammad Nassef of Matouk Bassiouny assess the regulatory landscape for mergers and acquisitions in Egypt
1. REGULATORY FRAMEWORK
1.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
Public M&A activity in Egypt is mainly governed by Capital Market Law 95 of 1992 (Capital Market Law) and its Executive Regulation 139 of 1993 and the Companies Law 159 of 1981 (Companies Law).
1.2 How, by whom, and by what measures, are takeover regulations (or equivalent) enforced?
Generally, the Egyptian Financial Supervisory Authority (EFSA) is legally entrusted with enforcing chapter 12 of the Capital Market Law's Executive Regulations on Tender Offers (Chapter 12). Chapter 12 sets out, among other things, certain disclosure requirements and other regulatory measures and thresholds to achieve its purposes. Failure to comply with such requirements, measures or thresholds is punishable by monetary fines and imprisonment.
2. STRUCTURAL CONSIDERATIONS
2.1 What are the basic structures for friendly and hostile acquisitions?
Acquisitions can be carried out through open market transactions or tender offers.
If the bidder intends to acquire up to less than one-third of the shares or voting rights of a public or listed company (the target), it may do so by either: (i) acquiring the shares through open market transactions by placing buy order through a licensed broker; or (ii) launching a tender offer to acquire the percentage of shares intended to be acquired.
If the bidder intends to acquire one-third or more of a target's shares or voting rights, it must launch a mandatory tender offer whereby it must offer to acquire up to 100% of the target's shares.
2.2 What determines the choice of structure, including in the case of a cross-border deal?
The choice of structure depends on the threshold of ownership offered to be acquired in the target, as well as other tax, regulatory and deal-specific considerations.
2.3 How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
This depends on whether the acquisition is effected by way of open market transactions or tender offers.
If the acquisition is effected through open market transactions, the timeline would primarily depend on the trading activity of the concerned share (the availability of shares offered for sale). With respect to actively-traded shares, the acquisition should be effected in a relatively short time span.
If the acquisition is effected by way of a tender offer, the offer must be valid for at least 10 Egyptian Exchange (EGX) trading days (EGX days) and no more than 30 EGX days. Competing offers may be made during the original offer's validity period provided that a competing offer may not be made during the last five EGX days of the original offer's validity period. If the EFSA accepts a competing offer, it may extend the validity period of the original offer.
2.4 Are there restrictions on the price offered or its form (cash or shares)?
Generally, the consideration for shares offered to be acquired by way of a tender offer may be cash, shares in another company or a hybrid of both. From a practical perspective, if the acquisition is made by way of open market transactions, the consideration must be cash.
If the price of a tender offer is in the form of a share swap or a hybrid the offer, EFSA may require the target to appoint an independent financial adviser to assess the offer, and, in case of mandatory tender offers, the target's shareholders must have the option to choose to receive cash instead of shares.
In addition, the price of the offer must not be less than the highest price paid by the bidder (or any of its related parties) in a previous tender offer made during the 12 months preceding the relevant offer.
Further more, in certain circumstances, shareholders holding at least three percent of the target's shares may request the shareholder holding (whether directly or indirectly) 90% or more of the shares to submit a tender offer to acquire their shares. In such circumstances, the price of such offer must be made in cash and must not be less than the highest price paid by the majority shareholder in a previous tender offer made during the 12 months preceding the relevant offer.
In addition, all competing offers must be in cash.
2.5 What level of acceptance/ownership and other conditions determine whether the acquisition proceeds and can satisfactorily squeeze out or otherwise eliminate minority shareholders?
A voting of the target's shareholders is not required for the acquisition to proceed.
Egyptian law does not recognise the squeeze-out concept and, as such, no shareholder may be under a statutory obligation to sell its shares.
2.6 Do minority shareholders enjoy protections against the payment of control premiums, other preferential pricing for selected shareholders, and partial acquisitions, for example by mandatory offer requirements, ownership disclosure obligations and a best price/all holders rule?
As a general principle, parties relevant to the tender offer (the bidder, the target, the independent and related advisers and their respective related parties) must deal with all the target's shareholders on an equal basis.
As noted above, if the bidder intends to acquire one-third or more of a target's shares or voting rights, it must a launch a mandatory tender offer whereby it must offer to acquire up to 100% of the target's shares. The price offered in such offer may not fall below the highest price paid by the bidder (or any of its related parties) in a previous tender offer made during the 12 months preceding the relevant offer.
Reaching certain ownership thresholds triggers certain disclosure obligations under Chapter 12 and the EGX Listing Rules.
2.7 To what extent can buyers make conditional offers, for example subject to financing, absence of material adverse changes or truth of representations? Are bank guarantees or certain funding of the purchase price required?
A tender offer may only be conditional on: (i) 75% of the target's shares being tendered by the shareholders, if the bidder intends to merge the target after completion of the tender offer; (ii) 51% of the target's shares being tendered by the shareholders; or (iii) if the price offered is shares in another company to be issued by way of increasing the share capital of such other company, the offer must be conditional on the approval of such company to issue the capital increase shares.
The tender offer may not be subject to any other conditions.
As part of the tender offer's documentation, the bidder must submit a statement issued by a bank licensed by the Central Bank of Egypt confirming the availability of cash resources sufficient for payment of the consideration for the shares subject of the tender offer.
3. TAX CONSIDERATIONS
3.1 What are the basic tax considerations and trade-offs?
The Income Tax Law has been amended so that capital gains achieved in respect of divesting listed shares are now subject to tax.
3.2 Are there special considerations in cross-border deals?
One of the special tax considerations in cross-border deals is the jurisdiction in which the sellers are incorporated and whether the country of such jurisdiction is a party to a double taxation treaty with Egypt.
4. ANTI-TAKEOVER DEFENCES
4.1 What are the most important forms of anti-takeover defences and are there any restrictions on their use?
Anti-takeover defences may take the form of the refusal of the target's board to cooperate with the bidder with respect to providing due diligence information.
In general, the target's board must pursue the best interests of the target and refrain from any action that may restrict the shareholders from determining the value of the target's shares on a proper basis. In addition, the parties relevant to the tender offer must abide by the principles of competition, freedom to submit offers and equality between the target's shareholders.
In particular, the Capital Market Law prohibits the target's board and managers to cause any material adverse change to the target from the date of the EFSA's approval of the offer until the announcement of the offer's results. This includes: (i) approving a capital increase that may frustrate the offer; or (ii) taking any actions that may materially affect the target's assets, increase its financial liabilities or hinder the target's future activity.
4.2 How do targets use anti-takeover defences?
The target's board may advise the shareholders against accepting the bidder's offer.
4.3 Is a target required to provide due diligence information to a potential bidder?
There is no explicit statutory provision requiring a target to provide due diligence information to a potential bidder.
4.4 How do bidders overcome anti-takeover defences?
A bidder (whether individually or along with other shareholders of the target) may submit a petition to the EFSA against any anti-takeover defence that it believes is illegal.
4.5 Are there many examples of successful hostile acquisitions?
There are not many examples of successful hostile acquisitions; friendly acquisitions are more prevalent.
5. DEAL PROTECTIONS
5.1 What are the main ways for a friendly bidder and target to protect a friendly deal from a hostile interloper?
As noted above, the relevant parties to the tender offer must deal with all the target's shareholders on an equal basis and must also abide by the principles of competition and freedom to submit offers and bidding.
From a practical perspective, however, the EFSA has accepted the concept of the bidder entering into lock-up agreements with existing shareholders of the target to protect the deal.
5.2 To what extent are deal protections prevented, for example by restrictions on impediments to competing bidders, break fees or lock-up agreements?
There are no explicit prohibitions on specific deal protections, however, the general principle in 5.1 applies.
6. ANTITRUST/REGULATORY REVIEW
6.1 What are the antitrust notification thresholds in your jurisdiction?
The Egyptian Authority for the Protection of Competition and the Prohibition of Monopolistic Practices (ECA) requires, among other things, a post-closing notification of any transaction which results in the acquisition of assets or shares, or the merger of entities if the annual turnover of the relevant parties to the transaction exceeds EGP100 million ($13 million). Moreover, the ECA does not have the statutory power to approve, block or modify any terms or conditions of the transaction.
6.2 When will transactions falling below those thresholds be investigated?
Transactions below such threshold are not required to submit notification. The ECA may investigate these transactions if a complaint is submitted that there is a violation of Egyptian Competition Law 3 2005. In addition, the ECA may investigate these transactions with respect to anti-competitive agreements or practices.
6.3 Is an antitrust notification filing mandatory or voluntary?
Antitrust notification filing is mandatory only with respect to transactions that might the criteria explained in 6.1.
6.4 What are the deadlines for filing, and what are the penalties for not filing?
The notification must be made no later than 30 days after effecting the transfer of shares. The penalty for not filing is a fine of no less than EGP20,000 and no more than EGP500,000.
6.5 How long are the antitrust review periods?
There is no antitrust review period.
6.6 At what level does your anti-trust authority have jurisdiction to review and impose penalties for failure to notify deals that do not have local competition effect?
There is no explicit statutory provision granting the ECA the authority to review deals that do not have local competition effect, so long as such deals are carried out outside Egypt.
6.7 What other regulatory or related obstacles do bidders face, including national security or protected industry review, foreign ownership restrictions, employment regulation and other governmental regulation?
If the acquisition is effected by way of a tender offer, the national security clearance is a prerequisite for EFSA's approval for launching the tender offer.
In addition, there are foreign ownership restrictions in certain exceptional cases. Acquisition of shares in companies in certain industries requires the written approval of the relevant regulator.
7. ANTI-CORRUPTION REGIMES
7.1 What is the applicable anti-corruption legislation in your jurisdiction?
There is no stand-alone anti-corruption legislation in Egypt. The Egyptian Penal Code 58 of 1937 is the applicable law.
7.2 What are the potential sanctions and how stringently have they been enforced?
The potential sanction is generally imprisonment. This sanction has been relatively stringently enforced with respect to discovered cases.
8. OTHER MATTERS
8.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
Political and social instability. However, this is improving and things seem to be returning to normality.
8.2 What are the key recent M&A developments in your jurisdiction?
The EGX Listing Rules and their Executive Regulations have recently been amended, introducing changes to several rules relating to listed companies.
First published by our sister publication IFLR magazine. Take your free trial today.
Omar S Bassiouny
About the author
Omar S Bassiouny is the co-founder of Matouk Bassiouny. He heads the firm's corporate and M&A group and has been consistently ranked in the top tier by legal periodicals in the areas of corporate law and M&A. He is particularly recognised for his private equity, venture capital and cross-border work. His recent highlights include representing Palm Hills Development on its right issue and Emirates NBD on its $500 million acquisition of BNP Paribas in Egypt.
Bassiouny has a Bachelor of Arts in public and international law from American University Cairo and a Licence en Droit from Cairo University. He is fluent in Arabic, English and French.
About the author
Muhammad Nassef is a counsel at Matouk Bassiouny and a member of the corporate and M&A team. He typically represents major private equity firms, multinationals and Egyptian companies on M&A. He also handles other corporate transactions such as joint ventures and corporate restructurings. Recently he advised Carlyle MENA on its proposed acquisition of a major Egyptian public company and Bristol Myers Squibb when it divested its Egyptian business to GlaxoSmithKline,
He has an LLM in corporate and commercial law from University of Virginia and a diploma in investment and international trade law from Cairo University. He speaks Arabic and English.