Egyptian Pre-closing Notification Merger Control Regime Applies to all Transactions Not Closed Before 1 June 2024

On 30 December 2022 the amendments of the Egyptian Competition Law approved by the Egyptian House of Representatives on 6 December 2022 entered into force. Initially the amended Competition Law was to apply to all transactions not closed by 30 December 2022. However, in early January 2023 the Egyptian Competition Authority (ECA) declared that it would refrain from enforcing the regime until the Executive Regulations to the Competition Law were amended to reflect the amendments of the Competition Law. After a lengthy back and forth between the ECA and the legislator including multiple revisions of draft amendments, the amendments to the Executive Regulations were approved by the Egyptian Cabinet of Ministers on 3 April 2024 and issued on 4 April 2024. Following this step the new pre-closing notification regime will fully enter into force on 1 June 2024. All transactions not closed by 31 May 2024 will be subject to the new regime.

The most significant change is the introduction of a pre-closing notification merger control regime with stand still obligation in Egypt. Furthermore, the law introduced amendments and clarifications on the definition of what constitutes an economic concentration, the notification thresholds, timeline of the merger control review process, and fines. The amended Executive Regulations now clarified certain additional matters such as calculations of turnover and asset values, exemptions, which parties are obligated to make a notification, and what constitutes a change of control.

Economic Concentration

The amendments require pre-closing notification of any transaction that constitutes an economic concentration within the meaning of the amended Competition Law and meets the statutory notification thresholds. Pursuant to the amended Competition Law, an economic concentration is any change of control or material influence over one or several undertakings. Thus, the new definition of economic concentration explicitly introduces a change of control element for the first time to the Egyptian merger control regime. Still, change of control as further defined by the amended Executive Regulations is very broad material influence over one or several undertakings. Thus, the new definition of economic concentration explicitly introduces a change of control element for the first time to the Egyptian merger control regime. Still, change of control as further defined by the amended Executive Regulations is very broad.

Change of Control

Joint control will suffice as change of control. Any transaction that would result in the change of control or decisive influence or establishment of joint control over an undertaking requires pre-closing notification to the ECA (provided of course that the notification thresholds are met). This includes any change in the ability to influence the strategic decisions or business objectives of an undertaking.

The amended Executive Regulations provide for a non exhaustive catalogue of matters that would give a—natural or legal—person material influence over an undertaking. The primary focus for establishing whether a person acquires material influence over an undertaking lies on the question of how large of an interest that person acquires in the undertaking. Pursuant to the amended Executive Regulations a person acquires material influence over an undertaking, if they either (1) acquire at least 25 percent of the share capital, shares, stocks, interest, or voting rights in the undertaking, or (2) acquire less than 25 percent of the share capital, shares, stocks, interest, or voting rights in the undertaking, and other circumstances provide the person with influence over the undertaking. These are:

• the distribution of voting rights in the undertaking is so fragmented, that the acquirer can still influence strategic decisions and business objectives of the target;

• the acquirer obtains in addition to the less than 25 percent stake in the target additional privileges such as special voting powers and veto rights. The amended Executive Regulations do not specify what matters such special voting powers or veto rights must apply to;
  • common shareholding or common shareholders between the acquirer and the target; or
  • one or more representatives of the acquirer being appointed to the board of directors of the target. The amended Executive Regulations do not define what a ‘representative’ of the acquirer means in this context. It remains to be seen whether a representative must have had a prior relationship with the acquirer or whether the acquirer having the right to appoint at least one board member would suffice. Also, it remains to be seen how the ECA will treat companies that do not have a board of directors but are managed by one or more general managers. We would expect that a representative of the acquirer becoming a general manager of the target would also suffice to bestow decisive influence over the target on the acquirer.

Where a person acquires less than 10 percent of the share capital, shares, stocks, interest, or voting rights in an undertaking, the acquirer is generally considered not to gain decisive influence over the target. An acquirer taking over a stake of less than 10 percent in a target only gains decisive influence over a target, if they (1) through the acquisition become one of the three largest shareholders, owners, partners, etc. in the target, and (2) at least one of the aforementioned additional circumstances are fulfilled.

This very broad definition of change of control and decisive influence put forward by the amended Executive Regulations goes beyond what is common standard in the MENA region and beyond. Based on the definition adopted even minority acquisitions, with which the acquirer gains typical minority shareholder rights, will be considered as leading to a change of control under Egyptian law. Furthermore, the reference to fragmented shareholding may lead to even small stake acquisitions in public companies being considered as leading to a change of control. The 10 percent shareholding threshold does little to mitigate this issue. In public companies the largest shareholders often only hold higher single digit stakes. Hence, a person acquiring a higher single digit stake in a public company will often become one of the three largest shareholders in the target. In addition, rights such to appoint a board of director are frequently granted to minority shareholders. It is difficult to understand why a transaction in which the acquirer takes over a single digit percentage in the target and gains the right to appoint one out of several director should require notification for merger control review, even if the acquirer becomes one of the three largest shareholders in the target.

Relevant Transactions

The amended Executive Regulations explicitly provide that the (1) merger of two or more undertakings, (2) acquisition of a stake in an undertaking by one acquirer leading to a change of control over the target, and (3) establishment of a joint venture or acquisition of an undertaking by multiple acquirers are economic concentrations within the Egyptian merger control regime.

Non-full function joint ventures do not require notification. Joint ventures that do not conduct their business independently from their parents and in a permanent manner do not qualify as economic concentrations and are thus excluded from the application of the Egyptian merger control regime.

Finally, there is no exemption for foreign-to-foreign transaction. Foreign-to-foreign are caught by the new Egyptian merger control regime and are subject to the same provisions as domestic or mixed transactions.

New Thresholds

Under the old post-closing notification regime, the notification threshold was EGP 100 million (approx. USD 2 million) combined turnover in Egypt of the parties to the transaction. The amendments substantially increased the notification threshold and introduced the possibility to meet the thresholds based on value of assets held by the parties. The new pre-closing notification regime includes two alternative notification thresholds. Economic concentrations will require notification, if either of the two thresholds is met.

• domestic leg threshold — notification is mandatory, if during the last fiscal year the combined Egyptian turnover or value of Egyptian assets of all parties to the transaction exceeded EGP 900 million (approx. USD 18 million), and the Egyptian turnover of at least two parties exceeds EGP 200 million (approx. USD 4 million) each.

• international leg threshold — notification is mandatory, if during the last fiscal year the combined worldwide turnover or value of assets held worldwide of all parties involved in the transaction exceeded EGP 7.5 billion (approx. USD 150 million), and the Egyptian turnover of at least one party exceeded EGP 200 million (approx. USD 4 million).

Under the international leg notification may be required for a transaction where only one party—including the acquirer—has revenue in Egypt. An additional local nexus test was not introduced by the amended Executive Regulations. Hence, transactions that target undertakings with no business in and no other connection to Egypt may require notification under the new pre-closing notification regime.

The turnover and asset value relevant for determining whether the notification thresholds are met, is calculated based on the last fiscal year of the parties for which financial statements are available. In an acquisition sell-side turnover and assets will only be considered when assessing whether the thresholds are met, if the seller retains a stake in the target. In a merger the threshold is calculated based on the turnover and assets of the merging and merged parties’ groups. In a joint venture transaction, the turnover and assets of the joint venture and their parents’ groups are decisive.

Where the turnover or asset value of a party is quoted in a currency other than Egyptian Pound, the conversion shall be made based on the rate announced by the Egyptian Central Bank on the last day of the fiscal year of the relevant person. Hence, the recent devaluation of the Egyptian Pound by approx. 60 percent against the US Dollar will only be relevant for parties who concluded their most recent fiscal year after early March 2024.

Review of Transactions Below the Threshold

Under certain circumstances the ECA may review transactions that fall below the thresholds. The ECA may—with the approval of the Council of Ministers—call in such transactions, if the ECA has evidence or indications that the transaction may develop negative impacts on competition in Egypt within one year after closing. The amended Executive Regulations include a non exhaustive catalog of circumstances that would raise concerns that a transaction that falls below the thresholds may still develop negative effects on competition in the near future. These are the transaction potentially (1) limiting technological advances or innovation, (2) causing changes in prices for products and services, (3) leading to lower quality of products and service, or (4) creating barriers for market entry or expansion.

Who is Obligated to Notify

In a single purchaser acquisition the acquirer is obligated to make the notification. In a merger the merged party is obligated to make the filing. Where multiple acquirers are acquiring a target to operate it as a joint venture, the joint venture is obligated to make the notification. Finally, in case of a new joint venture being established, the parents of the joint venture are obligated to file.

Exemptions

The amended Executive Regulations include several exemptions from the application of the Egyptian merger control regime. Temporary acquisitions of securities by a business trading force on 1 June 2024. All transactions not closed by 31 May 2024 are subject to the new regime. Still, there remains some ambiguity since amended Executive Regulations failed to clarify certain issues, such as the calculation of fines.

Furthermore, it remains to be seen how ECA will apply the new pre-closing notification regime in practice. Still, we can safely say today that the amendments will have far reaching implications for companies and investors with engagements in Egypt or those transacting with them. Since there is no local nexus test, transactions targeting undertakings with no connection to Egypt may require notification. Furthermore, considering the extremely broad interpretation of change of control minority acquisitions, with which a purchaser acquirers typical minority shareholder rights, may also require notification.

Finally, the new filing form has not yet been published. Hence, parties that are currently contemplating transactions that will require notification under the new regime, cannot prepare for such filings using the official new filing form. Hence, they are at this point left with preparing filings on best assumptions. One aspect parties should consider already now is formalization of documents. Egypt is not party to the Hague Document Convention. Hence, apostille cannot be used for foreign documents to be used in Egypt. In transactions involving foreign parties or foreign-to-foreign transactions, documents will have to be legalized based on the procedures agreed bilaterally between Egypt and the countries from which documents originate. This process can take considerable time. Parties should, therefore, start the legalization processes early.