EGYPT Law and Practice Contributed by: Nadia Abdallah, Zahra Ashraf, Beshoy Mounir and Yasmine Attia, Matouk Bassiouny & Hennawy
event is typically undertaken through direct negotia- tions between the selling shareholder and the poten- tial buyer (and possibly through a bid process). These negotiations typically culminate in a binding offer from the potential buyer, which is then followed by the drafting of the relevant transaction documents/ definitive agreements, typically a share purchase/sub- scription agreement and, where relevant, a sharehold- ers’ agreement. Asset Sale An alternative liquidity route involves the sale of a company’s assets, including properties, employees, licences, movables and transfer of material contracts and clients, as applicable. In such cases, the pur- chaser and seller enter into an asset purchase agree- ment, with the transfer of assets perfected before the relevant authorities upon execution of the required documentation. Typically, in private and public M&A transactions, the following key considerations should be noted in rela- tion to possible transaction terms: • Representations and Warranties: Representations and customary core and business warranties are contractual protections granted by the relevant seller (and also by the individual founders in some cases, or by the target company in the case of a capital increase) to the buyer under the relevant transaction documents, with a right of recourse being granted to the buyer in case of a breach. • Indemnities: The share and purchase/subscrip- tion agreements typically include comprehensive tax indemnities covering any and all potential tax liabilities identified during tax due diligence or otherwise. Business indemnities are also typically included where due diligence has identified a risk that could give rise to a claim against the target company during the period prior to closing. Gener- ally, indemnities shall not be subject to limitations, although the principals may agree otherwise. • Representations and Warranties Insurance: Repre- sentations and warranties insurance has been sug- gested (particularly by the seller) in several recent transactions. • Liquidity Event Restrictions: Change of control/ change in the shareholding structure restrictions
may arise in transactions subject to contractual or statutory prior consents or notifications.
3. Spin-Offs 3.1 Trends: Spin-Offs
In most energy and infrastructure projects, investors are either required by regulation or by the project doc- umentation to establish a dedicated special purpose vehicle (SPV) to undertake the project. Even where this is not mandated, investors frequently adopt an SPV structure in anticipation of external financing and the need to grant security over the project assets. The rationale is to isolate the project’s assets and liabilities within a single entity, thereby limiting the scope of any enforcement to the SPV without affecting the inves- tors’ broader corporate group. As a result, projects are typically structured through an SPV from inception, and spin-offs/demergers are not common. Neverthe- less, the founders may later exit fully or partially by transferring their shares in the SPV, subject to regula- tory approvals and any contractual transfer restric- tions or lock-up periods mandated thereunder. 3.2 Tax Consequences Generally, spin-offs/demergers are subject to the fol- lowing tax implications. Capital Gains Tax To begin with, a spin-off (demerger) is considered a change in the legal form of the company, necessitat- ing the valuation of the company’s assets to facilitate the separation of assets. If this valuation results in realised capital gains, the company will be subject to Capital Gains Tax (CGT) at a rate of 22.5% on the realised gains. In that sense, and according to Article (53) of the Income Tax Law, issued by Law No 91 of 2005, capi- tal gains resulting from the revaluation of assets are subject to taxation when there is a change in the legal form of a legal entity. A spin-off (demerger), where a resident company is divided into two or more resident companies, is considered such a change in legal form. The law allows for the possibility of deferring the CGT liability under specific conditions:
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