Forms of vehicle
What legal form of vehicle is typically used for private equity funds formed in your jurisdiction? Does such a vehicle have a separate legal personality or existence under the law of your jurisdiction? In either case, what are the legal consequences for investors and the manager?
Egyptian law requires private equity funds to take the form of a joint stock company (JSC), which has a separate legal personality. Under such a vehicle, the private equity funds are required to be managed by a third-party licensed fund manager. The liability of the investors is limited to the value of their participation and they are entitled to participate in the liquidation proceeds of the fund in a pro-rata ratio to the value of their participation in the fund. Investors are required to be part of a ‘certificate-holders’ assembly’ that is granted veto powers over certain material decisions concerning the private equity fund. This vehicle will be referred to hereinafter as the JSC PE Fund.
As an alternative to the private equity funds above, the Egyptian Financial Regulatory Authority (FRA) introduced in 2018 the possibility of conducting private equity business through a company limited by shares (CLS). This vehicle has existed in Egyptian legislation since the last century; however, it was rarely used in general and never used in private equity business. This vehicle mirrors the widely known GP-LP structure that is commonly used by private equity funds in many foreign jurisdictions. It has separate legal personality and it offers investors (limited partners) limited liability provided they do not interfere in the management of the company. The manager is required to be the general partner in the company and its liability towards the investors (limited partners) is unlimited. This vehicle will be referred to hereinafter as the CLS PE Company.
In both cases above, participation in private equity funds or companies must be privately placed to qualified investors only.
Forming a private equity fund vehicle
What is the process for forming a private equity fund vehicle in your jurisdiction?
JSC PE Funds must have a capital of at least E£5 million. Their founders (not investors) must pay the capital in full and in cash, each according to their contribution, and they receive shares against their capital contribution.
The JSC PE Fund’s by-laws must follow the specific model for articles of association that is provided by the regulator. The articles must include the fund’s name, type, term and address; details of the founders and board members; manner for subscribing to the fund; manner for appointment and dismissal of board members; procedures for future offerings; asset valuation mechanisms; fund manager duties; treatment of related parties and disclosures; conditions and manner of liquidation and extension of the fund.
Following the establishment of the JSC PE Fund, which takes about three weeks, a private equity fund license must be obtained from the regulator. The regulator issues its decision regarding licensing within 60 days from submission of the licensing application and all the supporting documents.
Following the licensing of the fund, and for the purposes of offering its certificates for subscription (which should take place within six months of licensing), a JSC PE Fund, in cooperation with the fund manager, is required to prepare an information memorandum, which must be approved by the fund’s board of directors before its submission to the regulator for ratification.
Promotion for subscription could be outsourced to a company that is authorised to undertake activities of promotion and underwriting of securities, a broker or a bank that is licensed for that purpose. Promotion of private placements could be made prior to obtaining the regulator’s ratification of the memorandum as long as it is informed, and the fund undertakes not to receive any money from qualified investors except after the memorandum is approved.
Subscription must be undertaken through a bank or a company that is licensed for that purpose. Subscription by an investor is considered an acceptance of the fund’s by-laws and the information memorandum, and an agreement to become a member of the certificate-holders’ assembly. It is enforced by way of an electronic certificate that is sealed and signed by the bank. The certificate must include: the title of the issuing fund; the date and number of the licence; the name, address and nationality of the subscriber and the date of subscription; the total value of offered certificates; and the value and number of subscribed certificates in letters and in numbers.
Subscription must be open for the full period that is determined in the memorandum, which must not in any event be less than five days or more than two months. If the total number of offered certificates is not underwritten within that period, the FRA may approve an extension for a period not exceeding two more months.
With respect to CLS PE Companies, these are also required to follow the same path of establishment and licensing, noting that they are not licensed to become funds but are licensed to undertake private equity business. The minimum capital of CLS PE Companies is E£10 million. The promotion and subscription to those funds have not been explicitly regulated at the time of writing.
Is a private equity fund vehicle formed in your jurisdiction required to maintain locally a custodian or administrator, a registered office, books and records, or a corporate secretary, and how is that requirement typically satisfied?
Both JSC PE Funds and CLS PE Companies are required to have an office (headquarters) and to comply with corporate governance and disclosure requirements. These include, among others, holding annual general assembly meetings and board meetings (if applicable), holding books and records and submitting quarterly, semi-annual and annual financial statements to the regulator.
JSC PE Funds are also required to hire an independent custodian as well as an independent management services company. The custodian is primarily in charge of keeping the documents evidencing the fund’s investments, while the management services company is in charge of safekeeping the electronic books of the holders of investment certificates and of calculating the net asset value of the fund on a regular basis. CLS PE Companies are not required to comply with the requirements stated in this paragraph.
Access to information
What access to information about a private equity fund formed in your jurisdiction is the public granted by law? How is it accessed? If applicable, what are the consequences of failing to make such information available?
No information regarding the investors or the amounts of their capital commitments are required by law to be made available to the public. They are, however, required to be made available to the regulator upon request.
Limited liability for third-party investors
In what circumstances would the limited liability of third-party investors in a private equity fund formed in your jurisdiction not be respected as a matter of local law?
Third-party investors who are only investment certificate-holders and are neither founders nor shareholders of a JSC PE Fund enjoy limited liability by virtue of the law. There are no given cases in the law in which a court could revoke the limited liability of the third-party investors.
With respect to CLS PE Companies, third-party investors (limited partners) enjoy limited liability to the extent that they do not participate in the management of the company. The law explicitly states that if a limited partner undertakes any management activity, its liability will extend beyond its participation in the company.
Fund manager’s fiduciary duties
What are the fiduciary duties owed to a private equity fund formed in your jurisdiction and its third-party investors by that fund’s manager (or other similar control party or fiduciary) under the laws of your jurisdiction, and to what extent can those fiduciary duties be modified by agreement of the parties?
The law requires fund managers to act cautiously in their management of the fund investments and to protect the interests of the fund as well as the investors in every transaction and every procedure it undertakes. The fund manager is further obliged to refrain from undertaking any action that may determine the rights of the investors. These duties may not be amended by agreement of the parties.
Other fund service providers are not subject to similar fiduciary duties.
Does your jurisdiction recognise a ‘gross negligence’ (as opposed to ‘ordinary negligence’) standard of liability applicable to the management of a private equity fund?
The difference between ordinary and gross negligence is recognised under Egyptian law, although under the general provisions of the law and not specifically within the context of private equity funds. In general, Egyptian law permits contracting parties to contract out of liability arising out of ordinary negligence; however, they may not contract out of liability arising out of fraud or gross negligence.
Other special issues or requirements
Are there any other special issues or requirements particular to private equity fund vehicles formed in your jurisdiction? Is conversion or redomiciling to vehicles in your jurisdiction permitted? If so, in converting or redomiciling limited partnerships formed in other jurisdictions into limited partnerships in your jurisdiction, what are the most material terms that typically must be modified?
JSC PE Funds are required to be closed-ended. A JSC PE Fund has:
- capital, which is owned by shareholders, divided into shares, and required to be paid in full in cash; and
- investors’ funds, which must be equivalent to, at most, 50 times the paid capital, and may be paid in cash or in kind and divided into investment certificates.
Investment certificates are required to be nominal with an equal value, which should be between E£1 and E£1,000. Where the PE Fund is privately placed, the value of the investment certificates may be paid in instalments, provided that at least 25 per cent of the investment certificate value is paid upon subscription and the remaining value is paid within five years.
JSC PE Funds are also required to have a general assembly for the shareholders, a board of directors with three to seven members (three of whom are required to be from among the shareholders and the rest are required to be independent), and a certificate-holders’ assembly for all investors. The board is also required to have an auditing committee formed from among the board members.
As mentioned above, there is a distinction between the shareholders of a fund and the investors (or the certificate-holders) therein. The founding shareholders are required to be:
- financial institutions (Egyptian, Arab, regional or foreign) with a minimum capital or assets under management equivalent to E£30 million;
- juristic persons that promote investments or development activities; or
- qualified investors with high net worth, which are defined as public juristic persons, pension funds, private insurance funds with E£100 million-worth of assets under management, companies with a minimum value of E£1 million and individuals who have at least three years of experience in the management of financial institutions and individuals who own at least E£500,000-worth of securities.
The founding shareholders of the fund are required to subscribe to the entire issued capital of the fund and the percentage of founding shares subscribed to by financial institutions should not be less than 25 per cent of the capital of the fund. Further, the percentage held by juristic persons (including financial institutions) should not be less than 75 per cent of the issued capital of the fund. Finally, 51 per cent of the issued capital of the fund must be subscribed to by Egyptian entities or individuals.
With respect to board members, the regulator requires that the majority of the members of the board of directors of a JSC PE Fund satisfy one of the following requirements:
- having worked as a managing director in one of the companies that work in the field of capital markets in Egypt for at least two years; or
- having work experience for at least 15 years in an Egyptian joint stock company or in a governmental authority that supervised and regulated the capital market or credit or investment, provided that at least three years of such a period are spent working:
- as a board member of a company working in the field of capital market or insurance or banking;
- in a leading position related to investment or financial or legal affairs in a bank or a joint stock company;
- in a leading or technical consulting position that is directly related to investment or finance or securities in any of the governmental authorities referred to above; or
- as an auditor who is registered with the regulator provided that he or she is not one of the auditors of the fund or any of its related parties.
As to investors in JSC PE Funds, only qualified investors are permitted to subscribe to investment certificates. Qualified investors are either high-net-worth individuals or financial institutions, pension funds, investment funds, and other companies specialised in investing in securities.
With regard to restrictions on the transfer of shares, the regulator requires obtaining its prior approval in the event that any person - acting alone or with or through a group of related investors - wishes to become an owner of one tenth, one-fourth, one-third, half, two-thirds or three-quarters of the shares or voting rights of a capital market company.
A JSC PE Fund may not invest more than 25 per cent of its net asset value in one company, except during the first year when the PE Fund is still in the process of building its portfolio.
Apart from the minimum requirements of founding shareholders, none of the above applies to CLS PE Companies. However, we expect CLS PE Companies to be subject to further regulation soon.
Fund sponsor bankruptcy or change of control
With respect to institutional sponsors of private equity funds organised in your jurisdiction, what are some of the primary legal and regulatory consequences and other key issues for the private equity fund and its general partner and investment adviser arising out of a bankruptcy, insolvency, change of control, restructuring or similar transaction of the private equity fund’s sponsor?
There are no specific legal and regulatory consequences to the fund itself. The fund will continue to exist and the shareholding of the fund sponsor will be transferred to another party as per the applicable rules for the transfer of shares in the relevant situation and subject to the minimum requirement being met as shown above.
Regulation, licensing and registration
Principal regulatory bodies
What are the principal regulatory bodies that would have authority over a private equity fund and its manager in your jurisdiction, and what are the regulators’ audit and inspection rights and managers’ regulatory reporting requirements to investors or regulators?
The FRA is the regulator of private equity funds in Egypt as well as fund managers. Non-bank custodians and management services companies are also regulated and supervised by the FRA.
The FRA is, by law, authorised to inspect all the documents of funds and their managers in Egypt.
With respect to JSC PE Funds, the fund manager is required to notify the FRA and the board of directors of the fund of any violation to the limits set by the investment policy as they occur and to provide the FRA with biannual reports on the fund’s activities, results, and financial position.
The management services company is required to send to the certificate-holders quarterly reports on:
- the net asset value of the fund;
- the number of certificates issued and their net asset value along with their market value, if existent; and
- any dividends distributed since the last report sent to the certificate-holders.
The custodian is required to provide the FRA with quarterly reports on the securities kept therewith and owned by the fund.
In addition, the board of directors of the fund is required to provide the FRA with the following:
- quarterly reports on the fund performance and results including full and sufficient information on its financial situation (to be prepared on the basis of the financial statements prepared by the fund manager) as well as the procedures undertaken by the board to manage the risks associated with the fund;
- the annual financial statements prepared by the fund manager as well as the auditors’ report thereon at least two weeks prior to their submission to the general assembly of the fund company. The financial statements must be submitted to the general assembly within 90 days from the end of the financial year; and
- the board of directors’ report on the activities of the fund, which must include - but not be limited to - a description of the fund’s activities and its financial standing, a disclosure of all related party transactions, and a brief on the extent to which the fund is in compliance with the Corporate Governance Rules.
What are the governmental approval, licensing or registration requirements applicable to a private equity fund in your jurisdiction? Does it make a difference whether there are significant investment activities in your jurisdiction?
A private equity fund is required to obtain an initial approval for establishment. Once this is obtained, the founders may proceed with the incorporation of the fund. Afterwards, the fund must apply for licensing as a private equity fund.
Registration of investment adviser
Is a private equity fund’s manager, or any of its officers, directors or control persons, required to register as an investment adviser in your jurisdiction?
The fund manager is required to be licensed as such by the FRA to carry out fund management activities. Its directors and senior management must also meet minimum requirements of expertise. Without meeting such requirements, their appointment will not be approved by the FRA.
Fund manager requirements
Are there any specific qualifications or other requirements imposed on a private equity fund’s manager, or any of its officers, directors or control persons, in your jurisdiction?
A fund management company is required to obtain a licence from the FRA to carry out its activities. To obtain such a licence, the fund management company must have a minimum capital of E£5 million and its board members and managers must have a minimum number of years of experience in the capital markets field set at five years and four years respectively.
In addition to the above, a fund management company must be 50 per cent owned by juristic persons, out of which at least 25 per cent must be owned by financial institutions.
Describe any rules - or policies of public pension plans or other governmental entities - in your jurisdiction that restrict, or require disclosure of, political contributions by a private equity fund’s manager or investment adviser or their employees.
There is a sweeping ban on joint stock companies from making political contributions to any political parties. Further, donations of any sort may not exceed 7 per cent of the average profits of the company for the previous five years.
Use of intermediaries and lobbyist registration
Describe any rules - or policies of public pension plans or other governmental entities - in your jurisdiction that restrict, or require disclosure by a private equity fund’s manager or investment adviser of, the engagement of placement agents, lobbyists or other intermediaries in the marketing of the fund to public pension plans and other governmental entities. Describe any rules that require a fund’s investment adviser or its employees and agents to register as lobbyists in the marketing of the fund to public pension plans and governmental entities.
No specific rules are targeted to this particular case. There are general rules requiring companies engaged in the promotion of and subscription to funds to be licensed to carry out such activities.
Describe any legal or regulatory developments emerging from the recent global financial crisis that specifically affect banks with respect to investing in or sponsoring private equity funds.
Would a private equity fund vehicle formed in your jurisdiction be subject to taxation there with respect to its income or gains? Would the fund be required to withhold taxes with respect to distributions to investors? Please describe what conditions, if any, apply to a private equity fund to qualify for applicable tax exemptions.
Generally speaking, a private equity fund that is legally resident in Egypt is subject to corporate income tax (CIT) in Egypt at the rate of 22.5 per cent. The taxable income is calculated by adjusting the results of the profit and loss account as required by the Income Tax Law (ITL). However, the ITL exempts the following from being subject to CIT in Egypt:
- dividends received by investment funds from the investee companies, after adding 10 per cent of the receipted dividends to the investment fund’s taxable income;
- returns from investing in cash investment funds;
- returns from bonds listed on the Egyptian Stock Exchange (EGX) other than treasury bonds;
- profits of investment funds that limit their investments in money only;
- distributions received by companies - resident in Egypt - from investment funds established under the Capital Markets Law No. 95 of 1992 provided that at least 80 per cent of the fund’s investments are in securities and debts instruments; and
- distributions received by companies - resident in Egypt - and made by holding investment funds provided that the latter’s investments are confined to the investment funds mentioned in (i).
As for personal income tax, distributions received by individuals resident in Egypt from private equity funds (resident or non-resident) will be subject to personal income tax in Egypt at the progressive rates provided in article 8 of the ITL.
Generally speaking, companies as well as private equity funds resident in Egypt are under obligation to withhold a tax on dividend distributions at the rate of 10 per cent. The tax withheld by the companies can be reduced to 5 per cent provided that:
- the recipient owns more than 25 per cent of the distributing entity; and
- the shares are held for a period of not less than two years.
This applies to dividends distributed to individuals and companies regardless of being resident or non-resident.
Local taxation of non-resident investors
Would non-resident investors in a private equity fund be subject to taxation or return-filing requirements in your jurisdiction?
The general treatment and the conditions for exemptions as provided in question 17 apply regardless of the distributions’ recipient being a resident or a non-resident.
Local tax authority ruling
Is it necessary or desirable to obtain a ruling from local tax authorities with respect to the tax treatment of a private equity fund vehicle formed in your jurisdiction? Are there any special tax rules relating to investors that are residents of your jurisdiction?
A taxpayer wishing to conclude a transaction having ‘significant’ tax effects can file an advance ruling to the head of the Egyptian Tax Authority (ETA) to understand the latter’s position regarding the aforementioned transaction. In practice, filing advance rulings requires the preparation of a long set of supporting documentation explaining the nature and the parties of the transaction. Additionally, the process takes a long time before getting a reply from the ETA.
Must any significant organisational taxes be paid with respect to private equity funds organised in your jurisdiction?
Private equity funds take the form of joint-stock companies and are subject to the taxes regular joint-stock companies are subject to (with an exemption from the taxes payable on the profits). Private equity funds do not attract additional taxes.
Special tax considerations
Please describe briefly what special tax considerations, if any, apply with respect to a private equity fund’s sponsor.
Being a private equity fund sponsor or founder does not attract additional taxes. A requirement to consolidate the financial statements may only be applicable depending on the domicile and structure of the sponsor or founder.
Please list any relevant tax treaties to which your jurisdiction is a party and how such treaties apply to the fund vehicle.
Egypt has in place 56 double tax treaties, the application of which differs depending on the prevailing circumstances and the relevant articles of the double tax treaty.
Other significant tax issues
Are there any other significant tax issues relating to private equity funds organised in your jurisdiction?
Selling restrictions and investors generally
Legal and regulatory restrictions
Describe the principal legal and regulatory restrictions on offers and sales of interests in private equity funds formed in your jurisdiction, including the type of investors to whom such funds (or private equity funds formed in other jurisdictions) may be offered without registration under applicable securities laws in your jurisdiction.
Sale of interests in private equity funds is required to be made pursuant to a private placement memorandum, which is required to be pre-approved by the regulator (the FRA). If the fund will use a third-party promoter, it has to be a company licensed by the regulator to undertake such activity.
Promotion of the fund may not take place except after the fund is licensed. However, the fund may commence the promotion prior to obtaining such licence provided it does not receive any money from the investors and it informs the regulator beforehand.
Further, private equity funds may only be placed to qualified investors, who are individuals meeting specific wealth requirements, financial institutions, pension funds, other funds and companies specialised in investing in securities.
Foreign fund interests may be promoted to Egyptian investors; however, they may not collect or receive the money in Egypt from members of the public as there is an Egyptian law that specifically bans the collection and receipt of money from the public without being licensed to do so.
Types of investor
Describe any restrictions on the types of investors that may participate in private equity funds formed in your jurisdiction (other than those imposed by applicable securities laws described above).
Please see above.
Identity of investors
Does your jurisdiction require any ongoing filings with, or notifications to, regulators regarding the identity of investors in private equity funds (including by virtue of transfers of fund interests) or regarding the change in the composition of ownership, management or control of the fund or the manager?
No filing or disclosure requirements are imposed in connection with the identity of the investors; however, various disclosure and filing requirements apply with respect to the founders of the fund and the fund management company. In brief, founding shareholders may not sell their shares during the first two financial years of a company’s life.
Also, persons who acquire 5 per cent of the shares or voting rights of a fund or a fund management company are required to notify the regulator within two weeks from the transfer. In the event that any person - acting alone or with or through a group of related investors - wishes to become an owner of one-10th of the shares or voting rights of a fund or a fund management company, it is required to obtain a prior approval from the regulator. The same applies every time this investor increases its shareholding by 5 per cent or its multiples.
Licences and registrations
Does your jurisdiction require that the person offering interests in a private equity fund have any licences or registrations?
Unless this is not done by the fund management company itself, the promotion of a private equity fund established in Egypt has to be done by a company licensed by the regulator to undertake the promotion of securities in general.
Describe any money laundering rules or other regulations applicable in your jurisdiction requiring due diligence, record keeping or disclosure of the identities of (or other related information about) the investors in a private equity fund or the individual members of the sponsor.
Private equity funds and fund management companies are required to follow the Egyptian Money Laundering Law requiring them to be fully aware of the identity of all investors in the fund.
Are private equity funds able to list on a securities exchange in your jurisdiction and, if so, is this customary? What are the principal initial and ongoing requirements for listing? What are the advantages and disadvantages of a listing?
JSC PE Funds may list on the EGX; however, it is not customary. In order to do so, the fund is required to submit to the EGX the private placement memorandum as well as a list of other documents. Then the fund’s manager and management service company are required to submit to the EGX and the FRA quarterly reports on the net asset value of the fund, the number of investment certificates issued and the value of each. The board of directors of the fund is also required to submit to the EGX and the regulator reports on any transactions constituting conflicts of interest before they occur and the competent corporate body’s approval as well as semi-annual reports on the fund’s activities.
Restriction on transfers of interest
To what extent can a listed fund restrict transfers of its interests?
There are no specific regulations on this point; however, there is nothing that prohibits the fund from determining such restrictions in the private placement memorandum. The only rule that applies is a general rule that voids restrictions on sale that would amount to a loss of the right to sell one’s owned property.
Participation in private equity transactions
Legal and regulatory restrictions
Are funds formed in your jurisdiction subject to any legal or regulatory restrictions that affect their participation in private equity transactions or otherwise affect the structuring of private equity transactions completed inside or outside your jurisdiction?
JSC PE Funds are required to invest only in securities such as shares, sukuk, bonds, investment certificates, convertible shares and securitisation bonds, among others. JSC PE Funds specialised in investing in micro-finance activities are authorised to receive micro-finance portfolio transferred thereto from licensed micro-finance companies and associations. The right to grant loans and guarantees to the investee companies is questionable, although the regulator is entitled to approve such investment tools, if they are explicitly stated in the private placement memorandum as an investment tool that the fund may use. The same applies to short-selling, margin trading and so on.
As to CLS PE Companies, these are only authorised to invest in securities and participations in simple partnerships.
Compensation and profit-sharing
Describe any legal or regulatory issues that would affect the structuring of the sponsor’s compensation and profit-sharing arrangements with respect to the fund and, specifically, anything that could affect the sponsor’s ability to take management fees, transaction fees and a carried interest (or other form of profit share) from the fund.
None. All fees must be disclosed, including carried interest.