Funding round readiness in Egypt: books, audit and capital increase

Executive summary

• Where an investor comes in for new shares, shares are the instrument of the joint stock company; a limited liability company may not issue negotiable shares (article 4 of Companies Law No. 159 of 1981).
• Issued capital is increased by decision of the ordinary general meeting by a majority of the shares represented, or by the board within the authorised capital (article 33).
• A fair value must be set for the new shares, and as a rule they are not issued to a new investor below it (article 17 of the Capital Market Law regulations); the premium goes to the legal reserve up to half the issued capital, then to a special reserve that may not be distributed as profit (article 94 of the Companies Law regulations).
• Existing shareholders have pre-emption rights over a cash increase as the articles provide, and the right may be traded during the subscription (article 96); its minimum period is thirty days in the Companies Law regulations and fifteen in the Capital Market Law regulations since 2024.
• Audited financial statements are compulsory for joint stock, limited liability and single-person companies (articles 103 and 128), and due diligence is built on them and on the books.

The vehicle: shares in a joint stock company

An investor coming in for shares presupposes a company whose capital is divided into shares, here a joint stock company, since a limited liability company may not issue negotiable shares or bonds (article 4). A company that started as a limited liability company should review its form well before the round, as set out in Egypt's company forms and the capital each requires.

The capital increase: who decides, and within what period

"The issued capital may be increased by decision of the ordinary general meeting by a majority of the shares represented at the meeting, and may be increased by decision of the board of directors within the authorised capital, if any", listed companies excepted (article 33, first paragraph, as replaced by Law No. 4 of 2018). The articles may set an authorised capital "exceeding the issued capital by not more than ten times its amount" (article 32).

The issued capital may not be increased before it is fully paid except by decision of the extraordinary general meeting, and subscribers to the increase must pay at least the proportion called on the existing capital. The increase must actually be made within three years of the decision, or within the payment period of the existing capital if longer, failing which the decision lapses (article 33).

The General Authority for Investment and Free Zones may object to an increase only where it is shown to have been made by fraud, to the detriment of third parties or shareholders, in breach of Egyptian Accounting Standards, or through a material breach of the Law and the rules on capital increases; the company must remove the grounds of an objection or appeal against it within fifteen days of notice, failing which the entry of the increase is struck out, and an appeal not decided within sixty days is deemed accepted (article 19 bis, added by Law No. 4 of 2018).

Fair value, premium and pre-emption

Fair value and premium. New shares are issued at nominal value plus issue expenses, and the board may add to the nominal value an issue premium that it sets on the basis of the auditor's report (article 94 of the Companies Law executive regulations). The executive regulations of Capital Market Law No. 95 of 1992 require a fair value to be set for the new shares at the time of issue, by an independent financial adviser registered with the Financial Regulatory Authority or, where the company is not listed, has not offered its shares to the public and is not a bank, an insurer or a securities company of the kind the article names, by a study the company prepares with the auditor's report attached; where the shares are offered with the existing shareholders waiving their pre-emption rights, "the shares must be issued at not less than the fair value" (article 17, as amended by Minister of Investment Decree No. 45 of 2015). Where new shareholders enter an unlisted company at nominal value, the Financial Regulatory Authority requires a declaration to that effect from all existing shareholders. The premium is added to the legal reserve until it equals half the issued capital, and any excess forms a special reserve, "provided that it is not distributed as profit" (article 94).

Pre-emption. "The company's articles must state the extent of the pre-emption rights of existing shareholders to subscribe for shares in a capital increase made in cash"; the right may not be confined to some shareholders, without prejudice to the rights of preference shares, and during the subscription period it may be traded separately or together with the shares (article 96). Its minimum period is thirty days from the opening of the subscription under article 97 of the Companies Law regulations, and fifteen days under article 31 of the Capital Market Law regulations since its amendment by Prime Ministerial Decree No. 2423 of 2024; it ends earlier if the existing shareholders take up their full entitlement. Both are minimum periods, so allowing thirty days satisfies both texts until the Financial Regulatory Authority settles which governs an unlisted company. They are notified by an announcement in two daily newspapers, at least one in Arabic, at least seven days before the subscription opens or, if the company has not offered shares to the public, by registered letter at least two weeks before (article 99, as replaced by Decree No. 199 of 2019 of the Minister of Investment and International Cooperation). A new investor coming in for a cash increase must therefore deal with that right: the existing shareholders waive it in writing, or the extraordinary general meeting, at the board's request and for serious reasons the auditor confirms in a report, offers the shares in a private subscription to one or more named persons or entities without pre-emption, the votes of those to whom it is addressed and their related parties being excluded unless all existing shareholders agree (article 32 of the Capital Market Law regulations).

Preference shares and convertible debt

Preference shares. If the investor asks for a privilege in voting, profits or liquidation proceeds, preference shares may be issued only with the approval of the extraordinary general meeting by three quarters of the company's shares before the increase, and an amendment of the articles, and voting and liquidation privileges may not be combined (article 35); the proposal is accompanied by an auditor's report on its reasons (article 92 of the regulations).

Convertible debt. If the funding comes as debt that converts into shares, there are two routes. One is bonds convertible into shares with the holder's consent, subject to the rules on capital increases (article 51), issued by the extraordinary general meeting on the board's proposal and an auditor's report, its resolution setting the conversion ratio or the method of valuing the share at conversion (articles 35 and 17 bis of the Capital Market Law regulations); they may be issued only after the issued capital is fully paid and up to the company's net assets as determined by the auditor from the latest financial statements approved by the general meeting (article 49), save in specified exceptional cases (article 50 of the Law and article 34 of those regulations). The other is for the creditor to subscribe for new shares against a cash debt the company owes it that has fallen due, by set-off, on a declaration by the board certified by the auditor (articles 90 and 101 of the Companies Law regulations).

The investor's agreement

The investor's rights in management, vetoes and restrictions on sale are written into a shareholders' agreement, which is lawful at incorporation or afterwards, but binds the other shareholders only if approved by the extraordinary general meeting by a majority of not less than three quarters of the capital, or by a higher majority in the cases set by the regulations (article 9 bis), including an agreement that confers additional rights in voting, profits or liquidation or restricts dealings in the shares or the management of the company (article 2 bis of the regulations).

Books, accounts and due diligence

An investor reads the company from its papers. Under Egyptian law the main ones are:

• Audited financial statements. A joint stock company has an auditor appointed by the general meeting (article 103), and the rules on the auditor, the stock-take and the financial statements apply to limited liability and single-person companies (article 128). The detail is in The statutory audit of Egyptian companies.
• Books. Keeping regular accounting records and books is compulsory for every taxpayer carrying on a commercial, industrial, craft or professional activity, without prejudice to Law No. 6 of 2025 (article 38 of the Unified Tax Procedures Law after Law No. 150 of 2026), as set out in Mandatory and electronic books in Egypt.
• Minutes of general meetings and of the board, and annual general meetings held on time, as set out in Ordinary and extraordinary general meetings.
• The tax position: returns filed, which years have and have not been examined, and any open disputes, as set out in The Egyptian tax examination.
• The social insurance position: the establishment's file with the National Organization for Social Insurance, and contributions paid on time.
• Contracts and intangible assets: contracts with customers, suppliers and employees, and the trademark registered in the company's name.

What this requires

• Convert to a joint stock company if needed, before negotiations rather than during them.
• Bring the audited financial statements for past years, the books and the meeting minutes up to date.
• Review the articles: the authorised capital, the pre-emption clause and the share classes.
• Prepare the fair value study, the auditor's report on it and a statement of how the proceeds will be used before setting the issue price, and arrange the existing shareholders' waivers or the private subscription resolution.
• Put the shareholders' agreement to the extraordinary general meeting so that it binds everyone.
• Prepare the due diligence file: commercial register extract, articles and share register, the tax and social insurance position, and the material contracts.

The firm's Corporate Legal Department prepares companies for a funding round, from amending the articles and the increase resolutions to the due diligence file, working with the Audit and Tax Departments.

Mahmoud Nassef, Founder Partner
Chartered Accountant, Ministry of Finance, Egypt

Member, Egyptian Society of Accountants & Auditors
Member, Egyptian Tax Society
Member, Egyptian Society for Public Finance and Taxation

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Disclaimer: This bulletin is prepared for general information on the legislation in force at the date of its publication. It does not constitute a professional opinion or tax or legal advice on any particular matter, and it should not be relied upon in place of advice based on an examination of the circumstances of each case. Nassef & Partners International accepts no responsibility for any action taken, or refrained from, in reliance on its contents. The positions stated remain subject to subsequent legislation and decisions.