Public and Private Offerings of Company Shares: Differences and Procedures

Capital increases, shareholder exits, and liquidity enhancement are pivotal stages in the lifecycle of joint-stock companies.

In the Egyptian market, boards of directors and shareholders face two fundamental options for financing through the securities market: public and private offerings of company shares.

Understanding the differences and procedures associated with each option is not limited to procedural considerations; it represents a strategic decision that directly affects the ownership structure, regulatory obligations, and extent of legal risks.

This article provides a practical legal analysis for local investors, foreign companies, and multinational companies seeking to expand in the Egyptian market or preparing to list their shares on the Egyptian Exchange.

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1. Legal and Regulatory Framework for Offerings in Egypt

The listing and offering of shares in Egypt are subject to a precise legislative and regulatory framework aimed at achieving a balance between companies and investors and safeguarding the stability of the financial market.

Governing Legislation

• Capital Market Law No. 95 of 1992, its Executive Regulations, and their amendments.
• Law No. 159 of 1981 on Joint-Stock Companies, Partnerships Limited by Shares, and Limited Liability Companies.
• Listing and Delisting Rules of the Egyptian Exchange issued by the Financial Regulatory Authority (FRA).

Principal Regulatory Authorities

1. Financial Regulatory Authority (FRA): The competent regulatory authority responsible for approving offering prospectuses and information memoranda.
2. Egyptian Exchange (EGX): The execution platform for share trading and transfers of ownership.
3. Misr for Central Clearing, Depository and Registry (MCDC): The entity responsible for the custody, deposit, registration, and settlement of transactions involving shares.

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2. Concept and Fundamental Differences: Public Offering Versus Private Placement

Offering mechanisms vary according to the category of investors to whom the offer is directed, the required level of disclosure, and the regulatory restrictions governing the process.

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3. Conditions and Practical Procedures for Each Type of Offering

First: Public Offering Procedures (IPO)

1. Corporate Resolution: The company’s extraordinary general meeting must issue a resolution approving the capital increase or sale and authorizing the board of directors to undertake the offering procedures.
2. Due Diligence: Comprehensive legal and financial due diligence must be conducted, with an independent financial adviser appointed to prepare the fair value assessment (Fair Value).
3. Preparation of the Offering Prospectus: A detailed subscription or offering prospectus must be prepared, covering all aspects of the business, the associated risks, and the company’s financial information.
4. FRA Approval: The file must be submitted to the Financial Regulatory Authority to obtain its approval and the approval of the offering prospectus.
5. Opening the Subscription Period: Accounts must be opened, the prospectus published in two daily newspapers, and purchase orders received through brokerage firms and the receiving bank.
6. Allocation and Trading: The share allocation process commences, the shares are deposited with the clearing company, and trading then begins on the Egyptian Exchange.

Second: Private Placement Procedures (Private Placement)

1. Identifying the Target Category: Verifying that investors satisfy the requirements applicable to a “qualified investor” under the FRA’s rules.
2. Preparation of the Information Memorandum: Drafting a focused information memorandum containing the conceptual and financial information and the expansion plan.
3. Approval of the Financial Regulatory Authority: Submitting the information memorandum to obtain the FRA’s non-objection to the private placement.
4. Negotiation and Execution of Agreements: Executing direct subscription agreements (Subscription Agreements) with the relevant institutions or individuals.
5. Settlement of the Transaction: Implementing the transfer of ownership or registration through the central depository and registry company and the Egyptian Exchange.

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4. Legal Risks and Commercial Implications for Companies

An offering entails fundamental changes to the company’s management, ownership, and financial structure. Consequently, it gives rise to a specific range of legal and commercial risks.

• Liability Risks for Incorrect Information: Egyptian laws impose civil and criminal liability on board members and advisers for any misleading or inaccurate information contained in the offering prospectus or information memorandum.
• Loss of Control and Management Authority: A public offering broadens the shareholder base, which may limit the founders’ ability to make unilateral decisions without the approval of the general meetings.
• Ongoing Disclosure Obligations: The company must immediately disclose material events and quarterly financial results, which requires a sophisticated internal organizational structure.
• Under-Subscription Risks: Failure to achieve the required subscription level in a public offering may adversely affect the company’s valuation and commercial reputation in the market.

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5. Considerations for International Clients and Companies

Cross-border investments and foreign companies seeking to offer their shares or invest in offerings in Egypt must take several specific considerations into account.

• Foreign Exchange Restrictions and Profit Repatriation: The mechanisms for opening designated foreign-currency bank accounts and the rules governing the repatriation of profits and sale proceeds must be verified in accordance with the instructions of the Central Bank of Egypt.
• Selecting the Optimal Tax Structure: Capital gains tax, employment income tax, and international treaties for the avoidance of double taxation should be examined.
• Alignment Between Domestic and Foreign Laws: When foreign companies are listed or Global Depositary Receipts (GDRs) are issued, precise legal alignment must be achieved between the requirements of the Financial Regulatory Authority and the regulations of foreign capital markets.

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6. Common Mistakes and Practical Best Practices

Common Mistakes to Avoid

• Inadequate Due Diligence: Failing to settle judicial disputes or obtain the required administrative licenses before commencing the offering.
• Failure to Account for Legislative Amendments: Drafting documents based on outdated templates that do not comply with recent amendments to corporate governance requirements.
• Failure to Address Minority Rights: Omitting provisions from shareholders’ agreements in private placements that protect minority rights or regulate exit mechanisms (Exit Strategies).

Practical Best Practices

Recommendation: It is always advisable to undertake comprehensive legal and corporate restructuring (Corporate Restructuring) between 6 and 12 months before the offering, while maintaining orderly corporate governance records to facilitate obtaining regulatory approvals.

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7. When Is the Involvement of a Specialist Lawyer or Local Counsel in Egypt Required?

The offering process requires the engagement of Local Counsel with practical legal experience in the Egyptian market, particularly in the following circumstances:

1. Restructuring and File Preparation: To determine the most appropriate type of offering and amend the articles of association in compliance with capital market laws.
2. Drafting and Preparing Offering Documents: Preparing the public subscription prospectus or information memorandum to ensure that it is free from legislative risks.
3. Representation Before Regulatory Authorities: Dealing directly with the Financial Regulatory Authority, the Egyptian Exchange, and the central clearing company.
4. Negotiating Investor Agreements: Drafting subscription agreements, share lock-up agreements (Lock-up Agreements), and corporate governance provisions.

How Can Specialized Legal Support Help?

El Rouby Law Firm provides an integrated approach that supports companies and investors throughout all stages of offerings and investment flows in Egypt through:

• Regulatory Compliance and Offering Preparation: Reviewing the company’s compliance with the securities listing and delisting rules and corporate governance requirements before commencing formal procedures.
• Legal Risk Management: Managing Legal Due Diligence processes and preparing legal soundness reports for the company.
• Drafting and Approval of Documents: Preparing and reviewing offering prospectuses, information memoranda, and shareholders’ agreements in accordance with the highest international and domestic legal standards.
• Representation Before Official Authorities: Representing companies and foreign institutions before the Financial Regulatory Authority (FRA), the Egyptian Exchange (EGX), and the clearing company (MCDC).
• Dispute Management and Settlement: Providing advice and resolving disputes that may arise during offering processes through negotiation, arbitration, or litigation before the Economic Courts.

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Conclusion

The choice between a public offering and a private placement of company shares is primarily based on the company’s strategic objectives and its readiness to comply with regulatory obligations.

Success under either route requires comprehensive legal preparation that protects the rights of all parties and ensures that the transaction complies with the Egyptian legislative framework.

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Frequently Asked Questions

Q1: What is the principal difference between a public offering and a private placement of company shares?

A: A public offering is directed to all categories of the public and requires comprehensive disclosure, an approved offering prospectus, and full listing. A private placement, by contrast, is directed to a specified category of qualified investors and relies on more streamlined disclosure documents and more flexible procedures.

Q2: Does a private placement require the approval of the Financial Regulatory Authority?

A: Yes. An information memorandum based on the company’s financial and legal circumstances must be submitted to the Financial Regulatory Authority to obtain its non-objection before commencing the private placement procedures.

Q3: What is the minimum percentage of shares that must be offered in a public offering on the Egyptian Exchange?

A: The Listing and Delisting Rules of the Egyptian Exchange prescribe a specific free-float percentage, which varies according to the company’s capital and the market on which it is listed, to satisfy trading liquidity requirements.

Q4: May foreign companies offer their shares in Egypt?

A: Yes. Egyptian legislation permits foreign companies to list and offer their shares or issue Egyptian Depositary Receipts, subject to satisfying the conditions and regulations issued by the Financial Regulatory Authority and the Central Bank.

Q5: What prospectus is required for a public offering of shares?

A: The process requires the preparation of a “public subscription prospectus” or an “offering prospectus,” which is a legal and commercial document containing all financial and structural information, risks, and the company’s approved financial valuation.