What Are Mergers and Acquisitions? Types and Legal Differences Between Them

Corporate restructuring is one of the most important strategic tools used by multinational companies, international investors, and local institutions to expand their business scope or enter new markets, including the Egyptian market, which is witnessing growing investment opportunities.

Before taking any executive step, a fundamental question arises for CEOs and foreign legal advisers: what are mergers and acquisitions? What are their types and legal differences? Understanding these concepts and the legislative framework regulating them in Egypt is not merely legal knowledge; it is the foundation for ensuring transaction compliance, avoiding regulatory risks, and achieving the transaction’s economic objectives.

This article provides a detailed guide explaining the legal structure of M&A transactions, with a focus on the particularities of the Egyptian market and the considerations relevant to both local and international investors.

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Legal Concept: What Are Mergers and Acquisitions?

Although the phrase “mergers and acquisitions” is commonly used as a single term, commercial law and company law treat each of them as an independent legal and structural mechanism that differs from the other in terms of its effects on the legal personality and patrimony of the participating entities.

First: Concept of Mergers

A merger is a legal procedure under which two or more companies unite to form one legal entity. In this case, the legal personality of one company, or all merged companies as the case may be, dissolves, and all of its assets, liabilities, and rights transfer by operation of law to the surviving company or to the newly formed company.

This is not considered liquidation of the dissolved company in the traditional sense. Rather, its entire patrimony is merged into the acquiring company or into the new entity.

Second: Concept of Acquisitions

An acquisition is a transaction in which a company purchases a controlling stake, all shares, or the assets of another company, without resulting in the disappearance of the legal personality of the target company.

The target company remains legally existing and continues its ordinary business, while the identity of its controlling shareholders changes, or ownership of its operational assets transfers to the acquiring company, depending on the transaction structure.

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Regulatory and Legislative Framework for M&A Transactions in Egypt

Mergers and acquisitions transactions in the Arab Republic of Egypt are subject to an integrated legislative framework applied by several regulatory authorities depending on the nature of the companies involved in the transaction.

Accordingly, foreign investors and international law firms must be familiar with the governing laws before commencing any transaction.

• Companies Law No. 159 of 1981 and its Executive Regulations, which regulate merger provisions, valuation of in-kind contributions, and extraordinary general assembly procedures for joint stock companies, limited liability companies, and partnerships limited by shares.
• Capital Market Law No. 95 of 1992, which regulates acquisitions of companies listed on the Egyptian Exchange (EGX) through mandatory or voluntary tender offers (MTOs), under the supervision of the Financial Regulatory Authority (FRA).
• Competition Protection and Prohibition of Monopolistic Practices Law No. 3 of 2005 and its latest amendments, which established the prior control regime over economic concentrations, requiring notification to the Egyptian Competition Authority (ECA) and obtaining its approval before completing certain transactions whenever the legally prescribed financial thresholds are exceeded.
• Investment Law No. 72 of 2057, which grants several guarantees and incentives to investors and regulates restructuring and amendment procedures before the General Authority for Investment and Free Zones (GAFI).

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Types of Mergers and Acquisitions and Their Legal Mechanisms

The legal and operational structures of M&A transactions differ according to the commercial objective and the nature of the participating companies, which is reflected in the legal procedures that must be followed.

1. Types of Mergers from a Legal and Structural Perspective

Under Egyptian legislation and international practice, mergers are divided into two main types.

• Merger by Absorption: the merged company is dissolved and its patrimony, including its rights and obligations, transfers to an existing company, with an increase in the capital of the acquiring company and distribution of new shares to the shareholders of the merged company.
• Merger by Consolidation: all merged companies are dissolved and a new company is incorporated, to which all assets and liabilities transfer, while shareholders of the former companies receive shares in the new company.

From an economic and commercial perspective, mergers may be classified into several forms according to the nature of the activity.

• Horizontal Merger.
• Vertical Merger.
• Conglomerate Merger.

2. Types of Acquisitions and Their Operational Mechanisms

The structure of an acquisition differs according to the subject matter of the purchase, whether shares, assets, or based on the nature of the target company’s approval.

• Share Acquisition: ownership of the shares transfers to the acquiring company, while the target company continues with its legal personality, contracts, and existing obligations.
• Asset Acquisition: the purchase is limited to specific assets such as real estate, trademarks, patents, or machinery, without transfer of ownership of the company itself, thereby limiting the transfer of undisclosed historical liabilities.
• Friendly Acquisition: carried out with the approval of the target company’s board of directors and shareholders after agreed negotiations.
• Hostile Acquisition: carried out by submitting a direct tender offer to shareholders without the approval of the target company’s board of directors.

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Legal and Substantive Differences between a Merger and an Acquisition

To clarify the legal differences in practical terms, the most important points of distinction may be set out as follows.

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Special Considerations for International Clients and Foreign Companies in Egypt

When implementing a cross-border M&A transaction within the Egyptian market, a set of legal considerations arises that requires the assistance of Local Counsel with experience in the local market.

• Restrictions on foreign ownership in certain strategic sectors.
• Foreign exchange and profit repatriation rules and compliance with Central Bank of Egypt (CBE) instructions.
• Protection of employees’ rights and transfer of employment contracts under the provisions of Egyptian Labor Law No. 12 of 2003.

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Legal Risks and Common Mistakes in M&A Transactions

The absence of proper legal planning may disrupt the transaction or burden its parties with significant financial and legal liabilities. Therefore, attention must be paid to the most prominent practical risks.

1. Conducting superficial legal due diligence, leading to overlooked litigation, tax liabilities, or operating licenses.
2. Closing the transaction before obtaining Egyptian Competition Authority (ECA) approval in cases requiring prior control over economic concentrations.
3. Weak drafting of Representations & Warranties clauses, failing to provide sufficient protection for the buyer.

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Practical Best Practices for Successful Mergers and Acquisitions

• Entering into a Memorandum of Understanding (MoU) or Letter of Intent (LoI) including preliminary terms, exclusivity, and confidentiality clauses (NDA).
• Conducting comprehensive legal, tax, and operational due diligence by specialists.
• Drafting a Share Purchase Agreement or Asset Purchase Agreement (SPA/APA) including Conditions Precedent, risk allocation mechanisms, and dispute resolution methods.

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When Is Local Counsel Required in Egypt?

Mergers and acquisitions are not limited to completing administrative procedures. They extend to reshaping the legal and commercial structure of companies, which makes engaging a specialized lawyer highly important at several stages of the transaction.

• Communicating with regulatory authorities such as GAFI and FRA.
• Preparing notifications for the Egyptian Competition Authority (ECA).
• Structuring the transaction legally and tax-wise.
• Issuing Legal Opinions.

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How Can Specialized Legal Support Help?

At El Rouby Law Firm, we possess the deep understanding and extensive practical experience that enable us to accompany our local and international clients through the various stages of the transaction, while providing legal solutions aligned with the requirements of the Egyptian market.

• Regulatory compliance and management of governmental approvals.
• Conducting legal due diligence and managing risks.
• Drafting all transaction documents in Arabic and English.
• Developing effective dispute-prevention mechanisms.
• Negotiation, settlement, litigation, and arbitration before the competent authorities.
• Legal representation before GAFI, FRA, ECA, and the Egyptian Tax Authority.

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Conclusion

Mergers and acquisitions represent one of the most important means of growth and expansion inside the Egyptian market. However, their success depends on a precise legal structure that understands the substantive differences between mergers and acquisitions and complies with the legislative and regulatory framework governing each transaction.

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FAQ

What is the main difference between merger by absorption and merger by consolidation under Egyptian law?

Merger by absorption means the merged company ceases to exist and transfers into an already existing company with an increase in the latter’s capital. Merger by consolidation means that all merged companies cease to exist and an entirely new company is incorporated, to which all assets and liabilities transfer.

Does acquiring a non-listed company require approval from the Financial Regulatory Authority (FRA)?

As a general rule, listed companies and companies operating in non-banking financial activities are subject to the supervision and procedures of the Financial Regulatory Authority, while non-listed joint stock companies are subject to the procedures and approvals of the General Authority for Investment and Free Zones (GAFI), taking into account the rules of the Egyptian Competition Authority if the transaction exceeds the financial thresholds for economic concentration.

What is the new economic concentration regime in Egypt and its effect on M&A transactions?

Under the latest amendments to the Competition Protection Law, the regime is now based on prior control, requiring notification to the Egyptian Competition Authority (ECA) and obtaining its approval before closing the transaction if the turnover exceeds the legally prescribed financial thresholds. Otherwise, the transaction may be considered void and financial penalties may be imposed.

What is the advantage of an asset acquisition compared with a share acquisition?

An asset acquisition allows the buyer to select specific assets and avoid the transfer of historical judicial or tax debts and liabilities associated with the selling company, unlike a share acquisition, which transfers the company with its legal package and existing obligations.

Do employment contracts transfer automatically when companies merge in Egypt?

Yes. Under Egyptian Labor Law No. 12 of 2003, the merger of an establishment or change of employer does not terminate employment contracts. Rather, the successor remains responsible for performing all obligations arising from them, while the seniority and rights of employees continue without reduction.