This country-specific Q&A provides an overview of Corporate Governance laws and regulations applicable in Egypt.
What are the most common types of corporate business entity and what are the main structural differences between them?
It is well established that the provisions of Egyptian laws provide various legal vehicles, however, the highly recommended legal forms came as follows:
Joint Stock Company (“JSC”);
Limited Liability Company (“LLC”);
One-Person Company (“OPC”); and
Branch of a Foreign Company (“BFC”)
Moreover, the material differences among the abovementioned legal forms are as follows:
JSC: the minimum number of shareholders shall not be less than 3 shareholders at least, and the latter may be a natural or legal person(s), additionally, the minimum amount pertaining to its capital shall not be less than an EGP 250,000 or its equivalent in a foreign currency, it should be noted that 10% of the issued capital shall be paid up prior to the incorporation process, within three months as of the company’s registration in the commercial register, the company’s issued capital shall be completed to reach 25% and the remaining 75% shall be completed within five years as of the company’s registration in the commercial register. Additionally, depending on the type of activity, the capital threshold could be much higher. The shares of a joint stock company, whether it is a private or a public company, can be traded on the Egyptian Stock Exchange (the “EGX”)
LLC: the minimum number of partners shall not be less than two partners at least and not exceeding fifty partners, the latter may be a natural or legal person. There is no minimum or maximum amount in relation to its capital, except for certain activities, which require a determined minimum capital. The quotas of the LLC cannot be traded on the EGX.
OPC: it must be owned by only one owner, whether, a natural or legal person, the minimum capital amount for such type is amounting to an EGP1,000 or its equivalent in a foreign currency and the said capital shall be paid up prior to the incorporation process. OPC is prohibited from undertaking the following actions, inter alia, public subscription, dividing its capital in the form of tradable shares, and borrowing through issuing tradable shares, as well as, OPC shall not practice the activities of insurance, banking, and fund investment for the account of a third party.
BFC: such a legal form is deemed as an extension of its parent company, BFC’s registration entails a set of requirements that differ from any other legal form, as the minimum capital shall be not less than EGP 5,000 or its equivalent in a foreign currency and such amount shall be fully paid up prior to applying for the registration, a concluded agreement with an Egyptian entity is required and it may be managed by one or multiple managers, regardless of the nationality.
What are the current key topical legal issues, developments, trends and challenges in corporate governance in this jurisdiction?
In recent years, the regulatory and legislative authorities seek to facilitate all obstacles pertinent to corporate governance, in doing so, it is permitted to convene general assembly meetings via modern communication means to mitigate the risk of pandemics, the management of either LLC or OPC has not entailed the presence of an Egyptian national manager and one of the main developments that have been issued recently is the pre-closing approval issued by the Egyptian Competition Authority (“ECA”) regarding Merger and Acquisition (“M&A”) transactions, provided that a transaction constitutes an economic concentration and exceeds the estimated turnover thresholds. However, there is a lack of electronic investment services in Egypt.
Who are the key persons involved in the management of each type of entity?
JSC shall be managed by the board of directorsand the board shall be chaired by its chairman, in return, other legal forms mentioned above shall be managed by one or multiple managers.
How are responsibility and management power divided between the entity’s management and its economic owners? How are decisions or approvals of the owners made or given (e.g. at a meeting or in writing)
Typically, the ordinary general assembly meeting (“OGA”), the board or manager(s), personnel, or agents that are designated by either the OGA or the board or manager(s) have the right to undertake any legal proceedings on behalf of an entity within the limits set forth in the law, an entity’s statute and its internal regulations. Moreover, responsibility and management power may be divided among the board members, as well as, the board has all powers concerning the management of an entity and undertaking all the business necessary for fulfilling its object; with the exception of such matters as are excluded by a special provision of the law or the statute or the general assembly. Nevertheless, the assembly may oppose any of the affairs of management in case of the board’s deficit to decide due to the board’s quorum is not attained or the inability of ensuring a majority in support of the decision. In the same context, owners’ decisions and/or approvals shall be duly recorded in the minutes of an entity’s meeting in question, and such minutes shall be signed by a chairman of the meeting, secretary, auditor, and vote-tellers, thereafter the said minutes accompanied by all supported documents shall be presented and endorsed before the regulatory authority.
What are the principal sources of corporate governance requirements and practices? Are entities required to comply with a specific code of corporate governance?
Undoubtedly, the provisions of law No. 159 for 1981 (“Companies Law”) and it’s executive regulations, as amended, Investment law No.72 for 2017 (“Investment Law”) and it’s executive regulations, law No. 95 for 1992 and its executive regulations, as amended, Corporate Governance Guide, Listing Rules, as amended and all circulars issued by the General Authority for Investment and Free Zones (“GAFI”) are deemed as the principal sources of corporate governance requirements and practices, in which entities shall comply and come in line with all provisions of the above-mentioned sources of corporate governance.
How is the board or other governing body constituted?
Legally speaking, the board of JSC shall be constituted of three board members at least, and the latter may be a natural or legal person(s) and the term of the first nominated board may be for 5 years, thereafter the term of the board shall be for 3 renewable years, moreover, it is permissible to form an administrative assistant committee upon a decision issued by the board and such committee shall be formed by the personnel representatives. In return, the other legal forms mentioned above, namely, LLC and OPC shall be managed by one or multiplemanager(s) and it is permissible to constitute a supervision committee, in case the number of LLC partners is more than ten partners. The company’s chairman, managing director, or any authorised signatory is accountable for the day-to-day management. As well as the board of listed entities shall comprise of two independent board members at least.
How are the members of the board appointed and removed? What influence do the entity’s owners have over this?
The appointment and/or dismissal of the board members shall be taken place by the company’s OGA, however, in certain cases, the restructuration of the board or the appointment of representative(s) for the board member may be taken place through the board of directors’ meeting and to be approved by the OGA, on the other hand, the extraordinary general assembly meeting (“EGA”) is entitled to appoint or dismiss either LLC or OPC’s manager(s) structure. Additionally, the appointment and/or dismissal of a board member shall be undertaken by virtue of either a declaration of accepting the appointment or a reasoned dismissal statement. Thus, the entity’s owners are deemed as the decision-makers in such matters.
Who typically serves on the board? Are there requirements that govern board composition or impose qualifications for board members regarding independence, diversity, tenure or succession?
Legally, the board shall be constituted of a number of board members not less than three board members at least, the board shall nominate from among its members the chairman of the board and its deputy, and the chairman may serve as a managing director as well. Moreover, it is impermissible to appoint a public servant as a board member unless upon the concerned minister’s approval in this regard and the board member shall not carry out any technical or managerial work for any other corporation, unless after obtaining the initial approval in this respect. Most importantly, the board member shall not be subject to a penalty for a crime or delinquency relating to theft or abuse of trust, or forgery or bankruptcy. Furthermore, the board of listed entities and entities operating in the field of non-banking financial activities shall comprise of a female representation at the rate of not less than 25% or two female board members at least. In all cases, the election of independent and non-executive board members shall observe that the member has the ability toallocate the time, exert all best endeavoursin favour of the entity, and avert a conflict of interests with any other entity.
What is the role of the board with respect to setting and changing strategy?
The board shall have the broadest powers to manage and operate the entity to achieve its respective purpose and maximize its profits and such powers, including but not limited to setting and changing the strategy and preparing a report pertaining to the entity’s activity within the fiscal year, provided that the approval of the OGA is required. Given that the board plays a pivotal role to set out the strategies, adopt public policies and oversee the performance of the executive administration, thus, the board has the full right to determine and/or change the internal policies, strategies, and mechanisms.
How are members of the board compensated? Is their remuneration regulated in any way?
Pursuant to the Egyptian jurisprudence, the remuneration of the board shall not be determined at a rate higher than 10% of the net distributable dividends after allocatingall of the prescribed and required consumptions and the distribution of a dividend not less than 5% of the capital on the shareholders and personnel unless a higher percentage is stated in the statute. Moreover, the general assembly shall determine all salaries, allowances, and any other benefits pertaining to the board members, however, wages and remunerations pertaining to the managing director shall be undertaken through a decision issued by the board of directors meeting. The board’s remuneration is duly regulated under the entity’s statute along with the provisions of Companies Law.
Do members of the board owe any fiduciary or special duties and, if so, to whom? What are the potential consequences of breaching any such duties?
Legally,the board owes a fiduciary duty towards the entity and its shareholders to act honestly, diligently, and in the entity’s best interest, as the board further shall not work for his account or for the account of any other entity practicing the same activities without obtaining the permission of the general assembly. It should be noted that such fiduciary duties may be vested from among the board, however, the chairman and the executive chief of the board shall represent the entity before the courts. Additionally, any breach by the board to their fiduciary duties will raise a liability vis-a-vis shareholders and the entity. legally, the civil lawsuit against the board due to their mistakes or default in the course of practicing their duties shall not be forfeited, notwithstanding any decision issued by the general assembly in this respect. if the matter had been submitted to the general assembly by a report of the board or the auditor, the lawsuit shall lapse after one year from the date of the decision of the general assembly approving the report of the board. Nevertheless, if the action imputed to the board constitutes a crime or delinquency, the lawsuit shall not be forfeited, unless the criminal lawsuit is forfeited.Thus, the board shall serve their duties within the scope and powers vested to them and shall carry their managerial duties for the interest of the entity and shareholders in order to prevent being subjected to legal accountability.
Are indemnities and/or insurance permitted to cover board members’ potential personal liability? If permitted, are such protections typical or rare?
On the legal front, the Egyptian legislation expressly stated the right to demand an indemnification, if necessary, in case of occurring any action contrary to the provisions of the law or any decision rendered by the board or the OGA in discord with its provisions, moreover, in case of multiplicity of those to whom the causes of nullity may be attributed, their responsibility for indemnification will be joint among them. On the other hand, the provisions of all relevant Egyptian laws have not explicitly introduced insurance to cover board members’ potential personal liability.
How (and by whom) are board members typically overseen and evaluated?
The board shall be overseen and evaluated through the OGA, and the latter has the exclusive jurisdiction to oversee the works of the board and approve the board’s annual report. Furthermore, the main competencepertaining to the OGA is monitoring the board’s works and discharging them from responsibility.
Is the board required to engage actively with the entity’s economic owners? If so, how does it do this and report on its actions?
Legally, the provisions of Egyptian laws do not expressly recognise the term economic owners, however, recent instructions have been enacted in connection with maintaining a ledger under the name of the ultimate beneficial owners and the said ledger shall include all names and data pertinent to the beneficial owners, whose own the entity in an actual manner and/or control it, regardless of being a natural or legal person(s). Crucially, the board shall engage actively with the entity’s owners and/or its shareholders by providing them with a report regarding the entity’s activities to be approved through the OGA.
Are dual-class and multi-class capital structures permitted? If so, how common are they?
Typically, the capital structure shall be constituted of either ordinary shares (cash or in-kind) and/or preferred shares, and the latter shall grant its holder(s) various privileges pertaining to voting, dividends, or balances of liquidation.
What financial and non-financial information must an entity disclose to the public? How does it do this?
Crucially, listed entities in the Egyptian Stock Exchange (“EGX”) are obliged to disclosure of either financial or non- financial information , as such entities shall release to the public any news or information that might reasonably be expected to materially affect the value of its security or influence investment decisions, as it shall have to disclose and report to both the EGX and the Financial Regulatory Authority (“FRA”) with their financial information and information on corporate resolutions in a timely manner, whereby any information that have a material influence on the price of traded security or its traceability,or affect the decisions of investors or the market, are considered material information which shall be disclosed to the EGX immediately, moreover, Listed companies shall provide EGX and FRA with quarterly disclosure reports clarifying the shareholders’ structure, their number, the board of directors’ structure, the status of treasury shares, and any changes thereto Such publications must be published on the EGX screens and the company’s website.
Can an entity’s economic owners propose matters for a vote or call a special meeting? If so, what is the procedure?
As a matter of law, the OGA of shareholders shall be held at least one time in the year within the three months succeeding the end of the fiscal year of the entity, however, the board shall call for the OGA whenever it is necessary. As well as, the board shall call for the OGA if the auditor or a number of shareholders representing 5% of the capital demand such a request. In return, the EGA of shareholders shall be held upon an invitation of the board to amend the entity’s statute, shortening or extending the entity’s term, the entity’s dissolution before its term, and amending the ratio of loss that led to the entity’s dissolution. Furthermore, if a number of shareholders represent 10% of the capital demand to hold the EGA, the board shall call for the EGA to be convened. In the same vein, if the entity’s loss reaches 50% of shareholders’ rights in accordance with the latest financial statements, the board shall call for an EGA to be convened to consider the approval of the entity’s liquidation or continuity.
What rights do investors have to take enforcement action against an entity and/or the members of its board?
It is well established that the Egyptian legislation by virtue of its provisions protects the investor’s rights against any deceptive actions and/or actions that might affect or harm an entity, whereby, the provisions of Egyptian laws have expressly referred to prescribed penalties that might be imposed by any defaulting person within an entity, moreover, such penalties are comprised of either monetary fines, imprisonment or both of them.Additionally, any civil liability to which the directors (including the chairman of the board) may be subject, vis-à-vis the entity, any shareholders or third parties will be jointly liable, thus, any action or decision rendered contrary to the provisions of the prescribed laws and/or any decision rendered by the board or the general assembly contradicted by Egyptian relevant laws shall be null and void, as well as, corporate liability is thus looked at as being a collective liability.Moreover, an entity and/or shareholders may recourse to litigations proceedings and file a lawsuit against the board, in case of the occurrence of any gross negligence and gross misconduct, noting that if the act has been presented to the general assembly of an entity through a report issued by the board or the auditor, then the liability will forfeit by lapse of one year from the date of the general assembly’s decision, unless it relates to a criminal offense, in such case the general prescription period for the relevant criminal offenses will apply. Thus, investors and/or entities have the full right to recourse to Egyptian litigation proceedings against any defaulting party, regardless of its capacity or any third party that affects or harms an entity due to any wilful gross negligence or gross misconduct, moreover, arbitration may be deemed as an option in certain cases expressly stated.
Is shareholder activism common? If so, what are the recent trends? How can shareholders exert influence on a corporate entity’s management?
It is worth mentioning that shareholder activism is not common in Egypt, however, we recently witnessed that a recent fund has been formed to act as an equity activist, and the latter is limited to a certain extent pertaining to corporate governance aspects, for instance, board representation and scrutiny of related party transaction.
Are shareholder meetings required to be held annually, or at any other specified time? What information needs to be presented at a shareholder meeting?
There are two principal types of shareholders’ meetings, namely, the OGA and EGA, legally, the OGA shall be held at least one time every year within three months as of the end of the fiscal year, however, such type of meeting may be called to be convened at any time, whenever it is necessary, moreover, the board shall publish the financial statements and adequate summary pertaining to the auditor’s report prior to the OGA meeting. Each shareholder during the OGA has the right to discuss the board’s report, financial statements, auditor’s report, and any grave matters revealed within the meeting. In return, the EGA shall be held at any time within the entity’s fiscal year upon fulfilling all conditions set forth in the law and the statute, as well as it is impermissible for the meeting to deliberate on the matter(s), other than that is expressly stated in the invitation, nevertheless, the meeting may deliberate on grave matters that are revealed in the meeting.
Are there any organisations that provide voting recommendations, or otherwise advise or influence investors on whether and how to vote (whether generally in the market or with respect to a particular entity)?
It is well established that the Egyptian legislationhasnot recognised or adopted such principal or recommendations.
What role do other stakeholders, including debt-holders, employees and other workers, suppliers, customers, regulators, the government and communities typically play in the corporate governance of a corporate entity?
Legally speaking, the corporate governance framework shallensure the rights of stakeholders established by law are recognized and respected.it is important to encourage cooperation between entitiesand different stakeholders to maximize wealth, create employment opportunities and achieve sustainability of financially sound enterprises. As the corporate governance framework shall determine the clear relations between the board and stakeholders to the utmost extent possible.
How are the interests of non-shareholder stakeholders factored into the decisions of the governing body of a corporate entity?
The Corporate Governance Guideprovides and recommends the full adherence of an entity in the contributions to economic and social growth, which urges to work in a responsible manner towards all stakeholders and the society in which the entityoperates and its impact on the surrounding environment. Moreover, the entity shall issue an annual report comprising a summary of the board’s report, financial statements, and any other info that might be vital for shareholders and stakeholders. In the same context, under the Companies Law, the change of the entity’s form should not entail prejudice of the rights of its creditors, as well as, creditors of the entity may demand from the concerned court to invalidate any decision(s) if the entity’s profits distribution has affected the creditors’ obligations.Furthermore, employees of the entity are entitled to a share of the distributable profits to be approved by the general assembly upon a proposal issued by the board.
What consideration is typically given to ESG issues by corporate entities? What are the key legal obligations with respect to ESG matters?
The FRA recently issued its decree concerning the ESG requirements, whereby, listed entities in the EGX are obliged with the ESG requirements, additionally, the following are deemed as the key legal obligations including but not limited to:
Operations and environmental controls, by providing details as to whether the entity has adopted an official ESG policy, whether this relates to the local subsidiary or parent company, whether the entity carries out an assessment of the ESG risks arising from its economic activities, adopts a defined policy for the recycling of waste or use of water of energy, or has specific targets for the reduction of greenhouse gases;
Carbon emissions, including details as to whether the entity calculates its yearly carbon emissions;
Electricity sourcing, including details of the entity’s energy consumption, sources, and saving;
Waste management, including details of the entity’s waste, produced yearly and its recycling status by type and volume;
Date protection, and whether the entity adopts any framework, measures, or international recommendations regarding data protection.
What stewardship, disclosure and other responsibilities do investors have with regard to the corporate governance of an entity in which they are invested or their level of investment or interest in the entity?
Legally speaking, other than the entity’s responsibilities in relation to the prescribed disclosures applied in Egyptian relevant laws, the liability of a shareholder is confined to the value of subscribed shares and shall not be accountable for the entity’s debts, except within the limit of subscribed shares by such shareholder, by analogy, the said principle is applied to partners of LLC, however, the OPC’s owner shall not be accountable for the entity’s responsibility, unless within the limits of the entity’s allocated capital. Investors after being shareholders or partners are obliged to attend and vote on an entity’s general assemblies, whereby, the attendance and voting process may be taken place either in person or by delegation. Most importantly, shareholders shall oversee and make sure that the board complies with all provisions pertinent to corporate governance on a much sound legal basis.
What are the current perspectives in this jurisdiction regarding short-term investment objectives in contrast with the promotion of sustainable longer-term value creation?
Recently, the FRA issued its decree regarding the prescribed terms and proceedings concerning the issuance of short-term investment instruments, whereas such instruments have been defined in the form of short-term bonds, financial instruments or any otherwise short-term securities (the “Short-Term Bonds”). Moreover, the issuance and offering of the said Short-Term Bonds are confined to the following entities, JSC, Limited Shares Partnership Companies (“LSPC”), Licensed entities practicing one of the financial non-banking activities, Banks subject to the supervisory of the Egyptian Central Bank (“ECB”), The international and regional financial institutions authorized to issue and offer debt securities in the Arab Republic of Egypt or guarantee the obligations of the issuer of these securities under bilateral or international agreements to which the Arab Republic of Egypt is a party, including the European Bank for Reconstruction and Reconstruction, the International Finance Corporation and other Arab and international institutions, and JSCs, whose issued and paid-up capital is not less than one million pounds and whose issued and paid-up capital is less than 100 million pounds or the equivalent in foreign currencies in the course of submitting the application for the registration in the EGX for the first time and whose issued and paid-up capital is less than 200 million pounds or the equivalent in foreign currencies aliens after that.
Furthermore, in the course of issuing Short-Term Bonds, the following obligations shall be strictly followed by the authorised entities mentioned above, including but not limited to,
The issuance of the Short-Term Bonds shall be taken place through a decision issued by JSC’s board or LSPC’s oversight board;
Conducting financial statements for at least two fiscal years preceding the issuance in accordance with the Egyptian Accounting Standards;
Obtaining a credit rating certificate issued by one of the credit rating agencies accredited by the FRA, or the guarantor obtains it, if any, provided that it is not less than (BBB) grade or its equivalent;
The appointment of at least an auditor who shall be duly registered in the FRA records throughout the issuance term;
The appointment of a legal advisor for the sake of the issuance;
The proceedings of the issuance shall be undertaken by one of the entities practicing in the field of securities and such entities shall be duly licensed by the FRA;
One of the banks that fall under the supervision of the ECB or one of the financial holding corporations shall act as the payment agent; and
Designating any licensed party to finalise the issuance process.
As well as the issuance of such Short-Term Bonds shall be undertaken for a period not exceeding 12 months for the stand-alone issuances and two years for the issuances program.
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