Structure and process, legal regulation and consents
How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?
Acquisitions and disposals of Egyptian privately owned companies are structured according to (i) the type of the company; and (ii) the target sale item (ie, assets or shares).
On the assumption that the target is shares, the process will depend on the legal type of the target shares of the company. The sale of shares in a joint stock company would be through a licensed brokerage firm that undertakes the execution of the sale via the Egyptian stock exchange and hence paper work by the Egyptian stock exchange is required, inter alia, sale and purchase orders. In relation thereto, it is worth mentioning that, for unlisted companies, a document evidencing the actual transfer of the purchase price to the seller’s bank account in a licensed Egyptian bank within a month at most is required, provided that the transaction exceeds 100,000 Egyptian pounds. This process usually takes around five business days excluding the conclusion of the transaction documentation (eg, share purchase agreement), whereas sales of quotas of a limited liability company is finalised via the annotation on the quota-holders ledger, which takes around one to two business days excluding the conclusion of the transaction documentation (eg, quota purchase agreement). The sale of assets, on the other hand, is a more burdensome process as it depends on the nature of each of the target assets (eg, real property requires the notarisation before the notary public, which takes up to two months).
Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?
The applicable law governing acquisitions in Egypt depends on the type, objective and law by virtue of which the target company is established; and (ii) the target sale item (ie, assets or shares). In cases of the sale of shares, the following would be applicable: the Companies Law, the Capital Market Law and the Investment Law, noting that if the target company is listed on the Egyptian stock exchange listing rules would also apply. In an asset sale, the applicable law would depend on the type of asset.
From a practical standpoint, transaction documentation may be governed by different laws. However, to execute the transfer of shares and assets, Egyptian Laws prevail. In this regard, the governing law must be Egyptian Law in sale of real property among other items that mandate the application of the Egyptian Law.
What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?
Under Egyptian Law, there is no distinction between a beneficial and a legal title. Legal and beneficial title of shares are assumed once the transaction is executed via the Egyptian stock exchange. The process is different in assets, whereby the general rule mandates that movable assets are transferred by possession and fixed assets (eg, real property) are transferred after being notarised before the notary public.
Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?
In Egypt, sellers are not obliged to acquire all the shares of a company. Generally, pursuant to Egyptian Law, the drag-along concept is not regulated and hence not possible. Nevertheless, acquisitions of more than 33 per cent of the share capital of a listed joint stock company mandates a mandatory tender offer to all the shareholders of such company.
Exclusion of assets or liabilities
Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?
Pursuant to general rule under Egyptian Law, any liability arising out of fraud or gross error cannot be excluded. Further, the parties may agree to exclude any liability arising out of tax or employees’ entitlements. Although the latter is contractually possible, however, in the case of a share sale, all the liabilities of the company are assumed upon title transfer. Hence, the transaction documentation usually provides for an indemnification mechanism.
Unlike the share sale, in an asset sale, the liability is assumed if a company sold all of its assets and stopped its operations. Generally, there are not any required consents or notifications to effect the transfer of assets or liabilities.
Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?
In Egypt, certain laws mandate obtaining a prior consent on the transfer of ownership of a business (eg, acquisition of 10 per cent of the voting rights or shares of a holding company requires the consent of the Financial Regulatory Authority, companies established in a fee zone are required to obtain the consent of the General Authority of Investments and Free Zones, change of ownership of an Egyptian licensed bank requires the approval of the Central Bank of Egypt and acquisition of companies operating in a non-banking financial activity requires the approval of the Financial Regulatory Authority subject to a 10 per cent threshold). Additionally, there are further foreign ownership restrictions in some industries such as commercial agency which requires a company to be fully owned by Egyptian nationals (individuals or juristic person) and importation activity require 51 per cent of the share capital to be owned by Egyptian nationals (individuals or juristic person).
Are any other third-party consents commonly required?
Yes, in cases where the articles of association requires them. Further, some of the company’s material documents might include a change of ownership or control clauses whereby the prior consent of such party is required.
Must regulatory filings be made or registration fees paid to acquire shares in a company, a business or assets in your jurisdiction?
Yes, in a share deal, there is a stamp duty tax imposed on both the seller and the buyer, whereas the sale of assets depends on the nature of the asset (eg, notarisation fees are paid in transfer of real property before the notary public).
Advisers, negotiation and documentation
In addition to external lawyers, which advisers might a buyer or a seller customarily appoint to assist with a transaction? Are there any typical terms of appointment of such advisers?
In certain types of acquisitions, it is mandated by the Egyptian listing rules to appoint an independent financial adviser such as in the acquisition by a listed company of assets or shares representing 10 per cent of its share capital. In the latter case, the financial independent adviser is required to prepare a market fair value of such respective shares or assets. Apart from any mandatory provision, the purchaser usually appoints an auditing firm to undertake a financial due diligence on the target company and financial advisers may be also appointed if it is contractually mandated between the shareholders of the target company.
Duty of good faith
Is there a duty to negotiate in good faith? Are the parties subject to any other duties when negotiating a transaction?
Pursuant to the general rule under Egyptian law, there is a general duty to act in good faith that entails negotiating in good faith. Apart from any fiduciary duties the directors have towards their own companies, there are not any other duties imposed thereon when negotiating a transaction.
What documentation do buyers and sellers customarily enter into when acquiring shares or a business or assets? Are there differences between the documents used for acquiring shares as opposed to a business or assets?
In Egypt, the general set of transaction documentation is usually the share and purchase agreement, the escrow agreement and shareholders agreement (if any). In a share deal, the parties are obliged to execute additional documentation as deemed required by the Egyptian stock exchange at the time of sale. In an asset sale, on the other hand, it involves the same set of documentation apart from a sale of asset agreement which entails all the target assets as opposed to the share purchase agreement and separate agreements on various types of assets to execute the same before the governmental authorities.
Are there formalities for executing documents? Are digital signatures enforceable?
Yes, in some cases, documents are required to be notarised, signatures should be bank verified or signed before the competent person (eg, the broker executing the transfer of shares before the Egyptian stock exchange).
In Egypt, digital signatures are enforceable subject to the following limitations as stipulated in article 18 of the E-signature Law No. 15 of 2004. The electronic document, in such case the contract, must fulfil certain conditions to have evidentiary value, be enforceable between the relevant parties and be deemed conclusive in providing evidence. These rules are: ‘The e-signature must be related solely to the signer, the signer shall have sole control over the electronic medium, the possibility to discover any modification or replacement in the data of any electronic written message or e-signature.’
In addition, according to article 8 of the Decree No. 109 of 2005 issuing the executive regulations of the E-signature Law:
Subject to the conditions prescribed in the Law, the determinative effect of the evidence prescribed for the electronic writing and the official or non-official electronic documents shall be established for their creator, if the following technical controls are fulfilled: (i) to be technically possible to determine the time and date of creating the electronic writing or the official or non-official electronic documents. Such availability shall take place through an independent electronic save system, which is not subject to control by the creator of that writing or these documents or by the party concerned with them; (ii) to be technically possible to determine the source of creating the electronic writing or the official or non-official electronic documents, and the degree of their creator’s control on that source and on the media used in creating them; and (iii) in case of creating and issuing the electronic writing or official or non-official electronic documents without human intervention, partially or wholly, their conclusiveness shall be established once it is possible to ascertain the time and date of their creation, and if such writing or documents have not been tampered with.’
Due diligence and disclosure
Scope of due diligence
What is the typical scope of due diligence in your jurisdiction? Do sellers usually provide due diligence reports to prospective buyers? Can buyers usually rely on due diligence reports produced for the seller?
In Egypt, purchasers tend to undertake a full due diligence on the target company, where the lawyers examine the operations of the company from a legal standpoint including, inter alia, required licensing, full review of the constitutional documents to assess if there are any restrictions and any third-party consents required pertaining to the material agreements concluded by the target company and an assessment of the employees’ rights and general compliance of the target company to the Egyptian laws. In addition to the legal due diligence, a financial due diligence is also exercised simultaneous to the legal one to assess the financial status of the target company.
Vendors’ due diligence are not common in Egypt and purchasers do not tend to rely on such report unless the transaction documentation provides warranties and limitations covering the same.
Liability for statements
Can a seller be liable for pre-contractual or misleading statements? Can any such liability be excluded by agreement between the parties?
In Egypt, if the statement is penalised by virtue of the Penal Code, the seller will be held liable, otherwise the parties usually agree in the transaction documentation that negotiations and precontractual statements are excluded and not relied upon. An exception to the foregoing, is the parties agreement in a binding pre-contractual document such as a letter of intent or term sheet, the seller would be contractually liable. See question 5 for the limitation of liability.
Publicly available information
What information is publicly available on private companies and their assets? What searches of such information might a buyer customarily carry out before entering into an agreement?
In Egypt, the information on private companies and their assets is not readily available. In relation thereto, other than the disclosures made by the listed companies, private companies do not disclose any information publicly. It is worth mentioning that any major lawsuit is usually published in the newspaper or news websites, which are usually reviewed by buyers prior to any agreement.
Impact of deemed or actual knowledge
What impact might a buyer’s actual or deemed knowledge have on claims it may seek to bring against a seller relating to a transaction?
Subject to the provisions of the Egyptian Civil Code and subject to the terms of the share purchase agreement, actual or constructive knowledge could potentially limit the buyer’s recourse in connection with the representation and warranties provided by the seller, subject to the court’s discretion unless the buyer proves that the seller assured him or her of the absence of the defects, or intentionally and fraudulently concealed them from him or her.
Pricing, consideration and financing
How is pricing customarily determined? Is the use of closing accounts or a locked-box structure more common?
The most commonly used pricing adjustment mechanism is closing accounts, which is used on the basis of the estimated accounts provided usually by the seller. The locked-box mechanism is also used but not as commonly as closing accounts, owing to leakage indemnity claims. However, there has been a tendency to deduct leakage from deferred payments instead of resorting to indemnity claims. The foregoing has recently helped in growing an appetite for the locked-box mechanism. Nevertheless, some parties still prefer the closing accounts mechanism as it covers any deviation from agreed upon figures (eg, net debt, net cash or normalised working capital), as opposed to locked-box, which protects the buyer only from leakage, which basically encompasses money withdrawn by the seller or its related parties.
Form of consideration
What form does consideration normally take? Is there any overriding obligation to pay multiple sellers the same consideration?
Cash is the common form of consideration. There no obligation to pay multiple sellers the same consideration unless the shareholders have an agreement imposing the same.
Earn-outs, deposits and escrows
Are earn-outs, deposits and escrows used?
In Egypt, the purchase price is usually deposited at an escrow account to give the seller certainty and avoid any trust issues. However, earn-outs are not commonly used.
How are acquisitions financed? How is assurance provided that financing will be available?
Acquisitions are typically provided via:
- third-party financing; or
- a combination of equity and financing.
Assurance is typically provided via a buyer warranty or documentary evidence confirming the availability of the acquisition financing.
There are various financing options in Egypt (credit financing). Usually the payment of the purchase price is a condition precedent to the transfer of shares. Hence, if finance is not available, the transaction is never closed.
Limitations on financing structure
Are there any limitations that impact the financing structure? Is a seller restricted from giving financial assistance to a buyer in connection with a transaction?
Under Egyptian law, there are regulatory limitations that could impact the financing structure including:
- the Central Bank of Egypt regulatory instituted limitations and regulatory framework regulating acquisition financing; and
- financial assistance rules, which, under Egyptian law, restrict a company from lending or guaranteeing the obligations of any of its board members.
Conditions, pre-closing covenants and termination rights
Are transactions normally subject to closing conditions? Describe those closing conditions that are customarily acceptable to a seller and any other conditions a buyer may seek to include in the agreement.
Yes, however, there is no constant practice in this regard, as conditions are decided on a case-by-case basis.
In Egypt, the parties usually agree to include, inter alia, the following conditions:
- full payment of the purchase price;
- obtaining any required consents and approvals, if applicable;
- convocation of the relevant general assembly meetings to effect such transfer;
- reconciliation of any of the major issues that were found by the due diligence exercise; and
- the non-distribution of dividends during the period between signing and closing.
What typical obligations are placed on a buyer or a seller to satisfy closing conditions? Does the strength of these obligations customarily vary depending on the subject matter of the condition?
We confirm that the nature of the condition impacts or affects the strength of the subject obligations.
Are pre-closing covenants normally agreed by parties? If so, what is the usual scope of those covenants and the remedy for any breach?
Pre-closing covenants are typical terms in a share purchase agreement, which vary between positive and negative covenants imposed on the seller as follows:
- continue to operate the business in the ordinary course;
- maintain its properties and insurance;
- comply with all laws;
- update the buyer on any changes or developments concerning the business;
- not to terminate customer or vendor agreements without obtaining the prior consent of the buyer;
- not to make any capital expenditures without obtaining the prior consent of the buyer;
- not to pledge or transfer any company assets outside the ordinary course without obtaining the prior consent of the buyer; and
- not to negotiate with any other party concerning the sale of the business.
Can the parties typically terminate the transaction after signing? If so, in what circumstances?
Although the parties can terminate the transaction after signing, it is not highly common in Egypt. This may happen owing to failure to obtain the necessary approvals or serve the relevant notices, which include, among others, approval to effect the change of ownership or control or notifying the competition authority of the acquisition.
Are break-up fees and reverse break-up fees common in your jurisdiction? If so, what are the typical terms? Are there any applicable restrictions on paying break-up fees?
In private M&A transactions, break-up and reverse break-up fees are commonly mutually agreed between the parties as a percentage of the purchase price, which is usually covered in the transaction documents. Though, under Egyptian law, there is room to claim reduction in the case of excessive fees. Based on the principle of Egyptian Civil Code, pacta sunt servanda, such fees are applicable when and if there has been a contractual arrangement to that end.
Representations, warranties, indemnities and post-closing covenants
Scope of representations, warranties and indemnities
Does a seller typically give representations, warranties and indemnities to a buyer? If so, what is the usual scope of those representations, warranties and indemnities? Are there legal distinctions between representations, warranties and indemnities?
The seller usually warrants and represents to the buyer that some statements are true, accurate and not misleading in all respects from signing to closing and do not omit to state any material fact necessary to make the statements herein not misleading. The scope of such statements is as follows:
- assuming the full capacity, power and authority to execute, deliver and perform this agreement;
- the seller is the legal and beneficial owner and sole holder of the sale shares and there are no options, encumbrances, or any other rights through which third parties can claim one or more of the target company;
- no actions, suits, appeals, claims, applications, investigations, orders, proceedings, grievances, arbitrations or alternative dispute resolution processes of whatever nature, in progress, pending, or to the seller’s knowledge, threatened against the seller, which prohibits, restricts or seeks to enjoin the sale and transfer of sale shares contemplated by this agreement nor threatened against the target company, or any material property or asset of the target company or directors of the target company in regards to their actions as such nor is there any basis for such action, proceeding, claim or lawsuit;
- the valid existence of a target company and good standing under the laws of the jurisdiction of its incorporation;
- concluding the share purchase agreement does not violate any applicable laws;
- the target company is not in breach of any agreements;
- the target company does not have any indebtedness or encumbrances or pledge;
- the target company holds valid licences and is in compliance of all the regulatory aspects; and
- there are no shareholders’ resolutions concerning the paying out of dividends, reserves or capital that still have to be effected.
The indemnification is usually a quantum and a course of action in the event of breach of any of the above warranties.
Limitations on liability
What are the customary limitations on a seller’s liability under a sale and purchase agreement?
The customary limitations on sellers’ liability are as follows:
- purchaser’s knowledge;
- limitations on quantum;
- time limits;
- recovery from third parties and conduct of claims;
- no liability if loss is otherwise compensated;
- future acts;
- acts approved by purchaser; and
- no double recovery.
Is transaction insurance in respect of representation, warranty and indemnity claims common in your jurisdiction? If so, does a buyer or a seller customarily put the insurance in place and what are the customary terms?
Transaction insurance is not used in Egypt.
Do parties typically agree to post-closing covenants? If so, what is the usual scope of such covenants?
Post-closing covenants are not common in Egypt since sellers tend to refuse their incorporation in the share purchase agreement as it will conflict with their business. Such covenants varies among others, confidentiality on any technical information, non-solicitation and non-compete.
Are transfer taxes payable on the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
There are any transfer taxes on the sale of assets. Sale of shares via the Egyptian stock exchange will trigger the payment of 3/1000 on the buyer and same on the seller, which is calculated on the consideration by which the transaction is executed before Egyptian stock exchange, provided that the transaction exceeded the acquisition 33 per cent of the target company shares.
Corporate and other taxes
Are corporate taxes or other taxes payable on transactions involving the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
In Egypt, sale of assets or shares will trigger the payment of various taxes, as follows:
Capital gain on the sale of assets or shares
22.5 per cent
22.5 per cent
The tax on capital gain shall be borne by the seller in case of an asset deal or by its shareholders in the case of a share deal.
In the event of distribution of profit - post transaction - the Egyptian resident shareholders of the target company shall also pay additional taxes on their dividends which varies from 5 per cent to 10 per cent according to the total shareholding.
14 per cent
The applicable rate on used fixed assets is calculated using the following equation:
(rate = purchase price * 30 per cent * 14 per cent VAT)
5 per cent-10 per cent
Employees, pensions and benefits
Transfer of employees
Are the employees of a target company automatically transferred when a buyer acquires the shares in the target company? Is the same true when a buyer acquires a business or assets from the target company?
In a share transfer, the employees do not transfer as said employees remain with the target company, hence acquisition of shares does not involve the process of employees’ transfer.
In an asset sale, pursuant to the Egyptian Labour Law No. 12 of 2003, if an establishment is transferred from one employer to another, employees of the transferred establishment shall be transferred automatically to the new employer. Noting that the former and the new employers shall be jointly liable for the fulfilment of their entire obligations as set out under the employees’ employment contracts. In such context, paragraph 2 of article 9 of the Labour Law states that:
merging the establishment with another or transferring it by inheritance, bequeath, donation, or sale - even by public auction - or by assigning or leasing it or other such disposing actions shall not terminate the employment contracts of the existing employees. The successor employer shall be responsible jointly with the former employers for implementing all obligations arising from these contracts.
Although the Labour Law recognises the concept of employees’ automatic transfer in the event of an asset sale, practically the transfer of employees cannot automatically be implemented before the Social Insurance Authority.
Notification and consultation of employees
Are there obligations to notify or consult with employees or employee representatives in connection with an acquisition of shares in a company, a business or assets?
Transfer of pensions and benefits
Do pensions and other benefits automatically transfer with the employees of a target company? Must filings be made or consent obtained relating to employee benefits where there is the acquisition of a company or business?
As clarified in our response to question 33, in a share transfer, employees of the target company maintain all their benefits, pensions and acquired rights, etc, as the change of the shareholding of the target company does not affect the employees’ status, unless contractually agreed otherwise by the parties.
However, in an asset sale, the buyer is under the obligation to continue employing the target company’s employees with either the same or more favourable employment terms and conditions than those stipulated under the employees’ current employment contacts.
To effect the aforesaid from a practical perspective, the transfer of employees is concluded through one of the following structures:
- first structure: the employees to resign as employees of the target company and enter into new employment relationships with the buyer. According to such structure, employees are assumed to receive all their employment entitlement from the target company before entering into new employment relationships with the buyer. In this case, the benefits of the employees cease to exist and commence a different scheme with the new buyer; and
- second structure: a tripartite agreement to be concluded between the target company; the buyer, and each relevant employee whereby the employees agree to terminate their existing employment relationship with the target company and continue their employment relationship with the buyer, whereby benefits, pension, etc, are transferred to the buyer.
Update and trends
What are the most significant legal, regulatory and market practice developments and trends in private M&A transactions during the past 12 months in your jurisdiction?
In line with the pace of reforms, Egypt is currently witnessing several developments to encourage investments and remove any restrictions pertaining to foreign investments. On the regulatory level, there have been major amendments in the Companies Law, Capital Market Law, Import and Export Laws to allow for foreign investors to acquire and establish companies to act as importation vehicles in addition to removing the restriction pertaining to transfer of shares during the first two financial years as of the incorporation of a company. Material examples include but are not limited to the following:
- the one-person company: Egyptian law identifies various forms of commercial enterprises. These are commercial companies divided into associations of persons (partnerships), and associations of capital (corporations), as well as sole proprietorships. The most important factor in distinguishing these legal forms is whether the partner in each form of company enjoys limited liability or if they do not. The reason behind introducing a new form of company that is the one-person company, is that the minimum number of required shareholders for a joint stock company is three shareholders, and the minimum for limited liability companies is two partners. It follows then that a single person was previously unable to establish a commercial enterprise on their own while maintaining limited liability;
- shareholders’ agreement: the introduction of legal provisions to govern an already existing concept that is the shareholders’ agreement. Shareholders’ agreements are typically concluded between the founders of a company to organise the relationship between the partners that are not contained in the articles of association that are ratified by the General Authority for Investment and Free Zones on a designated form; and
- preferred shares: in the past, a company was not allowed to issue preferred shares unless its by-laws contained a provision allowing that at incorporation. In this respect, a new provision allows a company to issue preferred shares, even if such was not provided for in its by-laws at incorporation, so long as an extraordinary general assembly vote representing three-quarters of the company s capital is obtained.