09 December

Converting a Limited Liability Company to a Joint Stock Company

Posted by cxxsx

A business may evolve over time to meet changing operational, financial, and strategic needs. One significant transition a company might undergo is the conversion from a Limited Liability Company (LLC) to a Joint Stock Company (JSC). This process involves transforming the structure, ownership, and governance model of the company to accommodate larger operations, raise capital, or align with future growth objectives.

According to the Joint Stock Companies, Limited Partnerships, Limited Liability Companies and One Person Companies Law no. 159 of 1981 (Companies’ Law) and its Executive Regulation No. 96 of 1982 (Executive Regulation) according to Article 136 of the Companies’ Law and Article 299 of the Executive Regulation the procedures that shall be applied the legal form of limited partnerships or limited liability companies may be changed by a decision issued by the extraordinary general assembly or the group of partners by a majority of three-quarters of the capital, as the case may be.

The change shall be made in consideration of the procedures and conditions for establishing the company to which the change is made within the limits of what is regulated by the executive regulations in this regard.

Changing the form of the company may not result in any prejudice to the rights of its creditors. Partners, or shareholders who objected to the change decision or did not attend the meeting in which the decision was issued for an acceptable excuse may request to withdraw from the company under the terms and conditions stipulated in Article (135) of the Companies’ Law, the companies whose legal form is changed, the company to which the change is made and the partners in them shall be exempted from all taxes and fees due to changing the form of the company.

Procedures of changing the company’s form

Article 299 of the Executive Regulation stipulates that:

Procedures of changing the legal form of the Company:

The legal form of a limited partnership may be changed to a limited liability company or vice versa, and either of the two companies referred to may be converted to a joint stock company, and the change shall be made by a majority of three-quarters of the partners or shareholders through an extraordinary meeting of the company’s general assembly.

The legal form of personal companies may also be changed to a joint stock company, a limited partnership, or a limited liability company with the approval of three-quarters of the partners, without prejudice to the rights of third parties in the company or the partners.

According to Article 18 the committee must approve the change of the Company’s form, taking into account the procedures and conditions for establishing the company to which the change is being made, except for the following:

Conclude an Article of Association for the company.
Determining the net assets of the company, according to the data recorded in the company’s ledgers and financial statements, provided that this is approved by an auditor registered in the register of accountants and auditors practicing the profession for a period of not less than ten years, provided that the Authority is notified of this determination, and the Authority within a week did not object for that, it shall be effective.
The founders shall conclude a meeting in regards to provide the resolution of the extraordinary general assembly that shall decide to change the Company’s form includes approval of its articles of association or bylaws and the selection of the first board of directors and auditor.

In this case, the provisions of Articles (295 to 298) of these regulations shall apply.

Changing the Company’s form from LLC to JSC

The Companies Law and the Executive Regulation premised the change of the Company’s form from LLC to JSC according to the following requirements:

Requirements of changing the Company’s form from LLC to JSC:

The full amount of the LLC capital shall be paid, through a bank deposit evidenced by virtue of a bank certificate from a licensed bank.
The company’s capital shall not be less than the minimum capital of JSC 250,000 EGP (Only Two Hundred and Fifty Thousand Egyptian Pound).
The company’s capital shall be paid – after fulfilling the minimum capital for JSC – by depositing a percentage of no less than 10% of the capital.
A financial inspection shall be done by the Economic Performance department to the Company, by reviewing for instance the approved financial statements, and the Company’s safe.
The Shareholders shall not be less than three either natural persons or judicial persons.
The Board of directors shall not be less than three members either from natural persons or judicial persons, and a representer shall be appointed to represent the judicial persons.
The Company shall be registered in of the Misr for Central Clearing, Depository and Registry “MCDR”.

Procedures that shall be done for changing the Company from LLC to JSC:

A financial inspection shall be done by the Economic Performance department to the Company, inspecting including but not limited the approved financial statements, and the company’s safe; knowing that all documents that is requested by the Economic Performance Department depends on the evaluation type, whether market evaluation, meaning that the shares are evaluated in regards to the Company’s assets, Company’s shares in other Companies, intellectual properties, The company’s business volume, duration and activity (and the evaluation shall be reviewed by the Economic Performance Department), or the ledger evaluation, i.e. the shares shall be evaluated through the provided documents from the Company’s Auditor, and these documents are as follows:

Evaluation documents (Market evaluation – Ledger evaluation):

Submit a request for a financial inspection in regards to change the Company’s form from LLC to JSC:

Approval to change the Company’s form.
Determine the evaluation date and the evaluation type (Market – Ledger).
Declaration from the legal representer not to dispose of, or mortgage, in-kind, or subsidiary rights on the assets subject to evaluation during the inspection period and until the date of authentication and ratification of the company’s extraordinary general assembly, and to annotate its decisions in the company’s documents.

Financial position for the Company from the beginning of the financial year until the date of submitting the authenticated financial evaluation request and the Auditor’s report.
The company’s financial statements approved from the company and the auditor for the past three years.
Detailed preliminary report describing the company’s assets and liabilities, and describe the followed evaluation basis, that shall be prepared by an expert office in the case of evaluate through market evaluation, or by the Company’s Auditor in the case of evaluate through Ledger evaluation.
Original recent Commercial Register and a copy of a valid Tax Card in the date of conversion.
Certificate from the Commercial Syndicate proves that the person performing the financial evaluation practicing for a period not less than ten years.
Certificate from the Company’s Auditor stating the company’s Taxation and Insurance status on the date of converting the Company’s form.
Detailed statement of the assets for each asset separately, indicating the cost of the asset, date of acquisition, accumulated depreciation, and net ledger value, attached with it the ownership documents for lands and buildings.
Minutes of inventory, inventory evaluation, and company’s treasury approved by the Inventory Committee and the Company’s Auditor.
Balance statement of the current accounts with sister companies, explaining the nature of the relationship, if any.
Balance statement for the company’s bank accounts , attached with it account statements and settlement reports.
Statements including all shares and quotas owned by the Company in other companies, attached with it a detailed statement including all documents that proves the company’s ownership in the companies, and invoices indicating purchase of the shares or/and quotas.
Statement with all the remaining assets.

Required documents in regards to the conversion from LLC to JSC

Filling the JSC Articles of Association prepared by the General Authority for Investment and Free Zones, containing an introduction to the company prior to the conversion.
Approval for conversion the Company’s form, increasing the Company’s capital to the JSC minimum capital, and the full payment of the company’s capital prior the conversion, authenticate the above-mentioned JSC Articles of Incorporation, according to an extraordinary general assembly meeting and an amendment contract to the needed articles.
Shareholders coding through a brokerage or bank through a custodian.
Shares are kept in a central custody company.
Attach the original economic performance evaluation report, taking into consideration the report’s duration.
Extraordinary general assembly meeting approving the conversion of the Company.
Original valid commercial register.
A copy of the Company’s Articles of Association and decision prior the conversion.
A JSC Articles of Incorpoartion including a preamble clause about the company from its incorporation until the date of the decision to the conversion of the Company’s form.
A bank certificate evidencing the depositing of a percentage of the capital.

Conclusion

Converting from an LLC to a JSC can offer significant benefits, including enhanced capital-raising capabilities, a more robust governance structure, and greater flexibility in ownership transfer. However, it also comes with increased regulatory compliance and governance responsibilities. Companies considering this conversion should carefully evaluate their long-term business goals, financial needs, and capacity to manage the new operational requirements of a Joint Stock Company.