M&A – Main differences between Share Deals and Asset Deals in Egypt

• Before entering negotiations regarding the transfer of shares, extensive due diligence must be conducted on the target company after signing a non-disclosure agreement between the parties.
• Considering the due diligence's outcome, a share purchase agreement (SPA) includes a clause on conditions precedent, conditions subsequent, warranties, stock returns, guarantees, and compensation aimed at allocating risks between the parties about the target's business and obligations, which are often heavily negotiated by the parties.
• The SPA must be in writing or otherwise stated in the target company's bylaws, not violate public policy  (so called “ordre public”), and provide adequate consideration.
• After transferring equity to the buyer, all of the target’s assets and liabilities remain with the target company. Target employees also remain employees by purpose, and the acquired rights of the employees shall remain untouchable.
• The applicable law governing acquisitions in Egypt depends on the type, object, and law under which the target company has been established. In the case of the sale of shares, the following would be applicable: Law No. 159 of 1981 (the “Companies Law”), Law No. 95 of 1992 (the “Capital Market Law”), and Law No. 72 of 2017 (the “Investment Law”) noting that listing rules would also apply if the target company were listed on the Egyptian stock exchange, the Egyptian Exchange (EGX).
• From a practical standpoint, laws from other countries may govern transaction documentation. However, to execute the transfer of shares, Egyptian laws prevail.
• In Egypt, specific laws mandate obtaining prior consent on the transfer of business ownership, such as the approval from the Financial Regulatory Authority (FRA) in case of the acquisition of a holding company, with the support of the Central Bank of Egypt (CBE) for the acquisition of banks. In addition, companies operating in the Sinai Peninsula should obtain the prior permission of the Sinai Development Authority.
• Under the general rule of Egyptian law, there is a 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 no other duties imposed thereon when negotiating a transaction.
• In Egypt, the general set of transaction documentation is usually the SPA, escrow, and shareholders’ agreements. In a share deal, the parties are obliged to execute additional documentation as deemed required by the EGX at the time of the sale.
  

• Depending on the nature of the asset, the buyer must survey and examine the asset to ensure its ownership and the absence of a third party's rights and pledges. The interested party must approach different authorities and governmental bodies to check the existence of any preceding matters and ensure that there are no levies.
• An Asset Purchase Agreement usually includes representations, warranties, and indemnities designed to minimize the risks between the parties over the target’s asset and the obligations incurred, which the parties often heavily negotiated. Furthermore, it should include an undertaking of the seller to issue all necessary documents, such as a power of attorney, to enable the seller to finalize the purchase procedures with various governmental entities.
• The law stipulates that in the event of selling the target company’s assets, the approval of the target company’s general assembly, authorization from the general assembly to sell the assets, or a proxy from all partners, is required.
  

In Egypt, the transfer process of a company's shares and quotas differs depending on its corporate type:

• Joint-Stock Company (JSC): A non-listed JSC's shares may be disposed of through licensed brokerage firms that handle the process with the EGX. Such transactions require the seller(s) and buyer(s) to conclude a contract with the brokerage firm and sign the sale and purchase orders and contract at the agreed value, which should be prepared by the brokerage firm as well. Furthermore, as a significant step towards the digitalization and dematerialization of securities, according to the Investment Law and recent amendments of Companies Law in 2018, all joint-stock companies and partnerships limited by shares must centrally deposit their securities with the MISR for Central Clearing, Depository and Registry (MCDR) through a licensed bank as the custodian. If the company's shares are not deposited at the licensed bank (custodian), the company’s share certificates must be deposited before the transaction initiation. In such a case, a contract must be concluded with the custodian bank to open an account to deposit such shares. The time required to complete this process is about one week; however, it may take longer if EGX requires further information or documents on the transaction, which must be fulfilled by the transaction's parties or the target company.
• Limited Liability Company (LLC): The transfer process of quotas in an LLC is more straightforward but takes longer. Before selling quotas in an LLC, the quota holder, willing to sell, must inform the target company’s management and the other quota holders of his intention and the details of the expected buyer and price and conditions of sale. The other quota holders, within thirty days, may declare their willingness to purchase the target quotas at the same price and conditions. A sale-purchase agreement shall be entered into between the seller and buyer to sell quotas in an LLC. Depending on the provisions in the target company's bylaws, this agreement may have to be registered, certified by a notary, or just signed in a written form. Once a sale-purchase agreement is signed, an extraordinary general assembly meeting of the target company must be held to amend the ownership structure in the bylaws and then be ratified by the General Authority for Foreign Investment and Free Zones (GAFI). Finally, the sales of quotas must be annotated on the quota-holders ledger.
  

The relevant authorities and procedures vary depending on the nature of the asset, for example, whether it is real estate property, IP, machines, etc.

• Law No. 114 of 1946 (the “Real Estate Registration Law”) regulates real estate transfers. According to this law, any real estate property must be registered with the Real Estate Registration and Notarization Administration; otherwise, the transfer of title will not be enforceable against third parties. Some real estate properties require the approval of other authorities, such as industrial lands and factories allocated with the Industrial Development Authority (IDA).
• The transferring of a trademark is made by way of an assignment. The assignee must submit an assignment contract and a power of attorney empowering him to register the trademark in his name before the Trademarks Registration Administration.
• To transfer industrial plants, an agreement to sell and purchase the buildings and machines must be concluded. While registration with the Real Estate Registration and Notarization Administration will be required for buildings and the land along with the approval of the IDA, the selling of machines needs no registration. Nevertheless, the buyer must ensure that such machines are not subject to any pledges according to the Movable Collateral Law (No. 115 of 2015).
  

There are two main types of taxes applicable to share transfers:

• Capital gains tax: If the seller is a resident taxpayer, any profits shall be subject to a 20 % tax in the case of listed securities and a 22.5 % tax in the case of unlisted securities. If the seller is a non-resident taxpayer, profits shall not be taxable in Egypt in the case of listed securities. However, they shall be subject to a 22.5 % tax in the case of unlisted securities. It is worth mentioning that non-resident taxpayers may benefit from Double Taxation Treaties with their countries.
• Stamp tax: For resident taxpayers, listed securities’ transactions are not subject to stamp tax, whereas unlisted securities are subject to 0,01 % of the agreed value split between the seller and buyer. For non-resident taxpayers, listed and unlisted securities are subject to 0,025 % of the agreed value split between the seller and buyer.

The Egyptian government agreed to reduce the tax rate on individual investors through stock funds to 5 % on the profit achieved, exempt equity investment funds from all taxes on stocks, and assign the funds to calculate and supply them without opening tax files for investors, and to stimulate venture capital investment funds through exemptions for their dealings in unrestricted shares of start-up companies and a tax reduction for policyholders to 5% in the event of profits.

The tax on assets depends on the type of asset, e.g. for real estate, being the most common transaction in Egypt, the tax amounts to 2.5% of the value or price of the property disposed of.