Introduction
In a world where the pace of economic change accelerates and competitive challenges intensify; the merger of companies has become one of the most strategic tools for achieving growth and expansion. It is not limited to merely increasing market share or improving operational efficiency; rather, it represents a legal and structural transformation that requires a comprehensive understand of all regulatory and legislative aspects.
In the Egyptian market, the legislator has defined a precise legal framework governing merger operation. In this article, we take you on a simplified tour to shed light on everything investors should know before taking this bold expansion decision.
What is the difference between a merger by absorption and a merger by consolidation?
Merger by Absorption:
This occurs when one company merges into another existing company such that the absorbed company ceases to exist entirely, and the absorbing company continues to exist alone, retaining its legal personality.
Merger by Consolidation:
This occurs by combining two or more existing companies so that all the merging companies cease to exist, and a new company is formed whose capital is the sum of the merged companies’ capitals. The new company has an independent legal personality distinct from the prior companies, and becomes responsible for the debts and obligations of the merged companies.
What types of companies are permitted to merge?
From a structural perspective, according to Article 130(1) of the Companies Law, companies of different forms may merge — for example, Egyptian joint-stock companies, or more than one joint-stock company may merge to form a new joint-stock company. Also, an absorbed entity may consist of branches, agencies, or corporate establishments.
Article 288 of the Executive Regulations of the Companies Law also provides that one or more companies may merge into existing joint-stock companies, or multiple companies may merge to form a new Egyptian joint-stock company (including joint-stock companies, simple partnerships, limited partnerships, limited liability companies, partnerships, and single‑person companies).
It is worth noting that Article 130 does not imply that a merger must always result in a joint-stock company for validity. It is permissible that the merger leads to changing the form of the company to a non‑joint-stock form, but the benefit is that if the merged companies adopt the joint-stock form, they may benefit from the advantages under Article 134 (such as exemptions from certain fees and taxes on account of the merger).
Also, under Article 53 of the Income Tax Law, the tax exemption on capital gains or losses arising from revaluation is limited to the case where assets and liabilities are recorded at their book value at the time of the merger, and that depreciation, provisions, and reserves are carried forward under the rules in force prior to merger.
Furthermore, under Article 130 of the Companies Law, foreign companies may merge into national companies or merge jointly (by consolidation) to form a new national company, provided the foreign company being merged carries on activity in Egypt, enabling merger with an Egyptian company or with other companies to form a new Egyptian company.
Regarding the object (purpose) of the merging companies, the legislator allows the extraordinary general assembly approving the merger of the merging companies to add complementary or proximate objects to the original object of the company. As a rule, however, the original object may not be altered entirely, for that would amount to forming a new company that must comply with the procedural requirements for that new activity under the law. These rules are enshrined in Article 68(b) of the Companies Law and Articles 227(2,3) of the Executive Regulations. Accordingly, two companies whose objects differ completely may not merge; there must be unity or at least complementarity of purpose.
The legislator also permits merger even if a company is in the process of liquidation, under Article 288(3) of the Executive Regulations — but this is conditional on the competent authorities of that company approving the cancellation of the liquidation.
What formal requirements must the law prescribe and that the merger agreement must contain?
The legislator has organized the draft merger agreement, stipulating that it should be prepared by the board of directors or whoever holds managerial authority in each of the merging companies, for submission to the extraordinary general assembly.
If the company is under liquidation, the draft merger agreement is also to be presented by the board of directors, pursuant to Article 138(2) of the Companies Law, which states that “the phrase ‘under liquidation’ is added to the company’s name, and the company’s bodies remain in place during the liquidation period, limited to acts not under the purview of the liquidators.”
Since the merger is outside the competences of the liquidator, in that case the draft merger must originate from the board of directors or managers or whoever holds administrative authority, as appropriate.
What data must the draft merger agreement include?
- The reasons for the merger, its objectives, and the conditions on which the merger is based, in terms of mutual obligations between the merged companies.
- The date which will serve as the basis for calculating the assets and liabilities of the merging companies.
- The preliminary estimate of the value of assets and liabilities of the merging companies, with due regard to the fair value of the assets.
- How the rights of shareholders or partners will be determined in the new company or in each of the merged companies and the absorbing company.
The draft must be accompanied by a report detailing the bases upon which the preliminary valuation of assets and liabilities was made, and explaining the reasons for determining the rights of shareholders/partners after the merger.
Which authority is competent to approve the merger agreement, and what majority is required?
The extraordinary general assembly is competent to approve the merger agreement in joint-stock companies, partnerships limited by shares, and limited liability companies, by the majority required for amending the company’s articles or memorandum of association, per Article 135 of the Companies Law and Article 292 of its Executive Regulations.
In partnerships (such as general partnership or simple partnerships), the group of partners holding the majority of the capital must approve the merger, unless the company agreement prescribes a higher majority.
If the merger results in increased obligations for some partners or shareholders, then according to Article 293 of the Executive Regulations, the merger agreement must be approved unanimously by those whose obligations increase.
An example of a non‑waivable increase in obligations is depriving a shareholder of the right to entirely assign his shares, forcing him to exit without his consent, or depriving him of rights to profits or to attend general meetings or to vote.
What procedures are necessary to complete the merger?
Article 294 of the Executive Regulations organizes the procedures for merger by absorption or consolidation.
If the merger involves establishing a new company (via consolidation), then the procedures for incorporation must be followed, taking into account the specific provisions on merger in the first chapter of the third part of the Regulations.
If the merger is with an existing company (absorption), then the procedures in Article 44 of the Executive Regulations must be followed.
A decision from the competent minister must be issued whether the merger is by absorption or consolidation, under Article 294(2).
Under Article 294(2), the procedures for registration in the commercial register and publication defined in Article 75 onward must be followed.
Pursuant to Article 75, the board of the merged and absorbing companies or their management must file the merger agreement as an amendment to the company’s agreement with the commercial register office where the initial registration was made. The commercial register must annotate the extinction of the merged companies, erase their registration, and annotate any capital increase or activity amendment.
In the case of partnerships, the provisions of Commercial Register Law No. 34 of 1976 apply, and the annotation of the merger in the register is effective against third parties.
After the commercial register is amended, the management of each merged company must publish the documents and data in the companies’ gazette at the company’s expense, including the merger agreement, the amended articles of the absorbing or newly formed company, the minister’s decision, and the date of the register annotation of the merger.
How is the objection by some shareholders or partners handled, and how is their share value determined?
Shareholders or partners who object to the merger in the meeting minutes or those who did not attend for an acceptable excuse may request to exit the company and redeem their shares by a written request delivered to the company within 30 days of the merger decision, under Article 135(2) of the Companies Law. The Executive Regulations stipulate further procedures and conditions for that request.
Under Article 295 of the Executive Regulations, objecting shareholders must record their objection in the minutes, and those who did not attend due to an acceptable excuse must notify the board or the manager by registered letter (with return receipt) explaining the excuse and their desire to exit. The board or managers must respond by registered letter within 15 days if the excuse is acceptable. In case of disagreement, the matter is referred to the judiciary to decide the validity of the excuse.
In all cases, exit requests must be submitted in writing via registered mail to the company within 30 days from the date the minister’s merger decision is registered in the commercial register.
Exit applicants must specify the number of shares or interests they own per Article 295(2).
Under Article 296, the board or managers notify objecting shareholders or partners of the value the company assigns to their shares or interests, based on the fair market value of all assets, and the date the funds will be placed at their disposal.
If a partner/shareholder disagrees with the offered value, they may take the matter to court under Article 135(3).
The amount determined must be paid to the existing shareholders before completing the merger procedures, per Article 135(4). These amounts have priority over the assets of the company (Article 135(5)).
What is the scope of liability of the absorbing or newly formed company regarding debts and obligations of the merged companies?
The merger results in the extinction of the merged companies’ legal personality and the transfer of all their assets to the absorbing or newly formed company without liquidation or division. Accordingly, the merged companies must not undertake any actions associated with dissolution or winding-up.
Article 131 of the Companies Law states that “the absorbing company or the newly formed company is considered the legal successor of the merged company, and replaces it in all its rights and obligations, within the limits agreed in the merger contract, without prejudice to creditors’ rights.” The Executive Regulations echo this in Article 298.
Thus, the absorbing or new company deals with third parties and answers for all obligations of the merged companies prior to the merger, and becomes the sole party in legal proceedings, either as plaintiff or defendant. Only it may be named in litigation concerning rights and obligations inherited.
Transfer of the financial corpus of merged companies as an in‑kind share in the absorbing or new company:
Due to the unification of the financial corpus through merger, the legal personality of the merged companies is extinguished, and all their rights vest in the absorbing or new company. If a creditor‑debtor relation existed between one of the merged companies and the absorbing/new company, the debt is settled to the extent the corpus has merged. This is pursuant to Article 131 of the Companies Law and Article 298 of the Executive Regulations.
The merger is deemed a capital increase of the absorbing or new company by an in‑kind share.
If the merged company is later separated from the absorbing company, it regains its independent legal personality and the capacity to represent its rights vis‑à‑vis third parties and in court.
The right of creditors of the merged company to request guarantees against the absorbing or new company:
Under Article 298(2) of the Executive Regulations, a creditor whose right arose against a merged company before the merger may request from the competent court to order guarantees from the absorbing or new company if there are serious considerations to justify that request. If no acceleration of payment is ordered or sufficient guarantees arise, the assets of the merged company shall remain as guarantee for the debt.
Conclusion
In conclusion, the merger is not merely an agreement between two companies, but a precise legal process entailing a complete restructuring of the legal, financial, and administrative status of the involved companies. Grasping the legal aspects is vital, especially with regard to the rights of creditors, the obligations of shareholders, and the effects of the merger on the financial corpus.
Because any error in this step may lead to legal disputes or financial losses, careful planning, engaging legal and accounting experts, and studying every clause in the relevant legislation is a necessity, not a luxury. Think of a merger as a bridge to a new phase of growth, but make sure that this bridge is founded on sound legal basis.
