Laws and Legislations Governing the Corporate Sector in Egypt

Laws and Legislation Governing the Corporate Sector in Egypt

“We consistently believe and affirm that specialization in any specific legal field must be preceded by comprehensive knowledge of the laws governing that field. Since corporate and investment laws are the most important tools that legal professionals rely on to master the corporate field—which is vast, huge, and in high demand in the job market—lawyers must possess mastery of the governing laws in this field, like knights wielding their tools, to professionally excel in this domain.”

Governing Laws

First: Civil Law

Civil Law is the father of laws, as it governs relationships between individuals or between natural and legal persons in general. In all private relationships, if we do not find a text that governs or addresses a specific situation, we refer to the rules of Civil Law as the father of laws.

Civil Law serves as the broad foundation for all branches of law as it establishes the general rules that govern individual’s relationships regardless of the nature of their activity, since its provisions include the general principles of legal logic in any field where legal reasoning is needed.

The Civil Law, in Articles 505 through 527, defines the meaning of a company, its elements, importance, effects, dissolution, and liquidation.

Article 505 (Civil)
Definition of the Company: A company is a contract whereby two or more persons commit to contribute to a financial project by providing a share of money or work, and to share the profits or losses resulting from this project.

Types of Companies:

1. Civil Companies (Projects that are civil in nature, such as law firms)
2. Commercial Companies (Partnerships and Corporations)

Partnerships:

• General Partnerships are formed by two or more persons for the purpose of trade, where all partners are jointly liable for all company obligations, even from their personal assets.
• Limited Partnerships are formed by two or more persons who hold financial shares and are outside of management (limited partners).
• Joint Ventures are partnerships formed between individuals among themselves but are not recognized as company before third parties.

Corporations:

• Joint Stock Companies: Their capital consists of shares of equal value, and each partner holds a varying number of shares. The law has placed many restrictions on establishing joint stock companies to protect shareholders and those dealing with these companies. A joint stock company cannot be established without an order issued by public authorities.
• Limited Liability Companies: A new type introduced by Law No. 26 of 1954, which has been exempted from the restrictions of joint stock companies while benefiting from all their advantages. It stipulates that liability is limited to the amount of shares owned by the partners.

Article 506 (Civil Law)
A company, upon its formation, is considered a legal entity, but this legal personality is not recognized by third parties until the publication and disclosure procedures stipulated by law are completed.

Nevertheless, if the company does not complete the prescribed publication procedures, third parties may still recognize its legal personality.

The acquisition of legal personality by a company results in important consequences:

1. It has a financial liability separate from the financial liability of the partners
2. It has the capacity to acquire or use rights
3. It has the right to litigate
4. It has a specific domicile and nationality

Article 507 Till Article 527 (Civil Law)
The company contract must be in writing, otherwise it is void. Any amendment to the company without written documentation is also void. This nullity cannot be invoked against third parties and has no effect between the partners themselves except from the time one of the partners invokes this nullity.

Second: Current Law No. 17 of 1999

(Previous Law No. 13 of 1983 must be read as it includes personal companies: general partnerships, limited partnerships, and joint ventures)

Third: Companies Law No. 159 of 1981

Regulates Corporations (Joint Stock Companies, Limited Partnerships with Shares, Limited Liability Companies)

Fourth: Investment Law No. 72 of 2017 (Previous Law No. 8 of 1997 is repealed)

Aims to:

1. Increase the percentage of local product, raise the level of competition, and combat monopoly
2. Grant exceptional incentives to labor-intensive projects and geographic areas most in need of development
3. Support small projects, especially youth, women, entrepreneurs, and startups
4. Provide incentives, exemptions, and protection for investors

Fifth: Law No. 4 of 2018

Issued to amend some provisions of Companies Law No. 159 of 1981

The most important addition of this law was the introduction of a new type of company that has gained popularity in the job market: the Single Person Company. This type of company was not known in Egypt before 2018 which allowing to foreign investors to personally establish a company where they are the sole founder, which was not possible before this law.

Sixth: Capital Market Law

Law No. 95 of 1992, amended by Decision No. 39 of 1998 Governs the laws and regulations of the securities market

Seventh: Labor Law No. 12 of 2003

This is the law that balances the rights of workers and the rights of employers. Since lawyers’ tasks are not only to establish companies but also to draft employment contracts, set internal company regulations, and achieve balance between the rights of workers and employers.

Eighth: Law No. 192 of 2009

This law regulates the work of the Financial Regulatory Authority as a public legal entity. The Financial Regulatory Authority is responsible for supervision and oversight of non-banking financial markets and instruments, including capital markets, futures exchanges, insurance activities, mortgage finance, and financial leasing.

Ninth: Public-Private Partnership Law

Public-Private Partnership Program (PPP)

Tenth: Corporate Governance Rules

Egyptian Corporate Governance Code (ECCG) Based on the principles of the Organization for Economic Cooperation and Development (OECD) relating to corporate governance

Establishment of Commercial Companies

General Substantive Elements of a Company Contract: –

(Consent, Capacity, Subject Matter, Cause)

First: Consent – Availability of offer and acceptance between the parties to the company contract

Defects of will: error, coercion, fraud, exploitation If the contract is affected by any of these defects, the contract becomes voidable in favor of the party whose consent was defective.

1- Error that invalidates the contract and makes the company contract voidable This is the substantial error of such gravity that the contracting party would not have entered into the contract had they not fallen into this error. The error is considered substantial if it pertains to the essential characteristics of the company. For example, if the error occurs regarding the nature of the company, such as when a person believes they are participating in forming a limited liability company while in fact it is a general partnership company, the error may also be related to the identity of the contracting parties, which is a common occurrence in partnerships.

2. Fraud Invalidating the Contract Makes the Company Contract Voidable The contract may be annulled due to fraud if the deceptions carried out by one of the partners are so grave that had the defrauded party known about them, they would not have signed the contract. This includes deliberately remaining silent about a fact or legal situation that, had the other party known about it, would have prevented them from signing. This means that the fraud must have been committed by one of the partners against another partner; if this fraud is by a third party, it cannot be invoked as a reason for invalidating the contract.

Second: Legal Capacity – The capacity required to enter into a company contract is the capacity to act. This is the capacity of an adult who has reached the age of 21, with full mental faculties and not under legal interdiction for any impediment to capacity, because a company contract is considered among transactions that can result in either benefit or harm.

A minor is not permitted to enter into a company contract; otherwise, the contract becomes voidable in the minor’s interest.

Third: Subject Matter of the Company Contract

The subject matter of a company contract refers to the economic activity that the company undertakes, which is the basis for the partners’ association, share distribution, and cooperation. This activity must be legal and legitimate, not contrary to public order. Therefore, any company contract established for an illegal activity or one that violates public order and morals is considered void.

The company’s purpose must also be physically and legally possible. A company contract becomes void if its purpose involves activities prohibited for certain types of companies. For example, Law No. 159 of 1981 prohibits limited partnerships by shares and limited liability companies from engaging in banking, insurance, savings operations, or receiving investment deposits on behalf of others.

The subject matter may also refer to each partner’s obligation, which must be legitimate. A partner’s contribution cannot be illegitimate—for instance, a contribution cannot consist of exploiting political influence or power.

Fourth: Cause

Similar to the subject matter, the cause for establishing any company is to generate profit through legitimate business activities.

Special Substantive Elements of the Company Contract:

1. Multiple partners
2. Contribution of shares, which may be:
   • Monetary
   • In-kind
   • Ownership
   • Rental
   • Work/services

Requirements for a Valid Company Contract

In addition to meeting the general substantive elements previously mentioned, for a company contract to be established, special substantive elements must be present without which the company cannot exist. Without these elements, the very concept of the company is negated from its foundation. These elements can be derived from Article 505 of the Civil Code, which defines a company as a contract whereby two or more persons commit to contribute, each with a share of money or work, to a financial project for the purpose of dividing any profits or losses that may arise from the project

Therefore, it becomes clear that the special substantive elements are:

1. Multiple partners
2. Contribution of shares (financial or work)
3. Sharing of profits and losses

First: Multiple Partners

Some may think that having multiple partners is not a special condition for establishing a company but rather a general condition that must be met in all partnership contracts because it is self-evident that multiple parties are needed in a contract, as it naturally expresses the agreement of two wills. This means that one person alone cannot form a company, as the term ‘company’ requires there to be more than one partner. It is inconceivable to have a company without partners. The natural minimum number of partners in Egyptian law is two, which is the minimum required in civil companies as well as in commercial partnerships (general partnerships, limited partnerships, and joint ventures). This is also the minimum requirement for limited liability companies.

As for joint-stock companies, Article 8 of Law 159 of 1981 stipulates that ‘the number of founding partners shall not be less than three, and if the number of partners falls below the mentioned quorum, the company shall be considered dissolved by force of law if the quorum is not completed within six months at most.’

Second: Contribution of Shares

Partners must contribute the shares they have committed and pledged to provide, as the company’s capital, which serves as the general guarantee for its creditors, consists of the total of these shares. The partners’ shares need not be equal, but they must be assessed, meaning their value must be determined. This determination is necessary to know the share provider’s portion of profits, losses, and liquidation surplus when the company is dissolved or liquidated.

If the company contract does not specify the value of each partner’s share, the law establishes a legal presumption that the partners’ shares are presumed to be of equal value (Article 508 of the Civil Code). This presumption is simple and can be rebutted with evidence to the contrary.

The shares contributed by partners need not be of the same nature. They may be a sum of money or work performed by one of the partners. Financial shares may be monetary or in-kind that can be valued in money (such as movable property, real estate, trade names, and patents).

Although the law permits a partner’s contribution to be in the form of work, all partners’ shares cannot consist solely of work. There must be financial shares to form the company’s financial entity, which can achieve the financial project.

Third: Sharing of Profits and Losses

This is a fundamental element in the company contract and a logical matter required by the very idea of the company, which assumes a union of interests among the partners and their desire to achieve the desired profits and face the risks of potential losses.

Written by: Ehab Khalil