The Impact of Subscription in Egyptian Joint Stock Companies Between Existing and New Shareholders

Subscription to shares in joint stock companies constitutes one of the most significant legal and financial mechanisms for corporate financing, whether at the stage of incorporation or upon capital increase. The process of subscription gives rise to important legal and economic implications that affect the relationship between existing and new shareholders, particularly in light of the regulatory framework established under the Egyptian Companies Law No. 159 of 1981 and its Executive Regulations.

First: Subscription and Its Importance

Subscription is the process by which a company offers its shares for subscription to the public or to a specific class of investors, in consideration for payment of their value, thereby resulting in the formation or increase of the company’s share capital. The significance of subscription lies in providing the necessary financing for the company’s activities without resorting to borrowing, while distributing risks among a broader base of investors.

Second: The Impact of Subscription on Existing Shareholders

Upon a capital increase, the issuance of new shares may have a direct impact on the rights of existing shareholders. The most significant of these effects include:

Dilution of Ownership Percentage:

If an existing shareholder does not participate in the subscription, their percentage ownership in the share capital is diluted, which may adversely affect their ability to exercise control and influence decision-making within the company.

Exercise of Pre-Emption (Preferential Subscription) Rights:

The Egyptian legislator has sought to protect existing shareholders by granting them pre-emptive rights to subscribe to newly issued shares, each in proportion to their existing shareholding, unless the Extraordinary General Assembly resolves otherwise in accordance with the applicable legal controls.

This has been expressly provided for by the legislator under Article (48) of the Egyptian Companies Law No. 159 of 1981. Which states:

“Existing shareholders shall have a pre-emptive right to subscribe to the shares issued upon a capital increase, each in proportion to their shareholding in the capital, unless the Extraordinary General Assembly resolves otherwise.”

It may be inferred from this provision that:

That the pre-emptive right constitutes a general rule;

It may not be waived or excluded except by a resolution of the Extraordinary General Assembly;

Article (49) of the Executive Regulations, states:

It requires that any waiver of pre-emptive rights be duly justified and carried out in accordance with controls that ensure no prejudice to existing shareholders, together with full disclosure of the reasons for such waiver.

Although there is no explicit provision governing “dilution,” the application of Article 48 implicitly serves to protect shareholders against such effect. And:
If such right is not exercised, the shareholder shall bear the consequences of the dilution of their ownership percentage.

Impact on Profits and Dividends:

An increase in the number of shares may lead to a decrease in earnings per share in the short term, if the capital increase is not accompanied by a corresponding increase in the company’s profits.

Third: The Impact of Subscription on New Shareholders

Subscription represents an opportunity for new investors to enter the company’s ownership structure, giving rise to several implications, including:

1- Acquiring the Title of a Shareholder:

Upon subscribing to shares and paying their value, the subscriber acquires the status of a shareholder and enjoys all associated rights, including the right to attend general assemblies, vote, and receive dividends.

This is evidenced by the relevant legislative provisions, Article (6) of the Companies Law, in which it states that It provides that a shareholder shall not be liable for the obligations of the company except to the extent of the value of the shares for which they have subscribed.

Subscription results in the following:

• Acquisition of shareholder status; and
• Entitlement to both financial and administrative (governance) rights.

Shareholder’s Rights

Article (64) of the Companies Law states that the shareholder has a right to attend the General Assembly and to vote. And;

Article (70) Regulates the shareholder’s right to receive dividends as resolved for distribution.

2- Legal and Economic Risks:

Risk Exposure: The new shareholder assumes the risks of investment, including market fluctuations and the company’s performance, without having had any prior influence over its management.

3- Ability to Influence Management:

Where the subscription is made for a substantial stake, the new shareholder may be able to influence the company’s decisions or secure representation on the board of directors.

Fourth: Balancing the Interests of Shareholders

The Egyptian legislator seeks to achieve a delicate balance between protecting existing shareholders and attracting new investors, as reflected in:

1. Regulation of Pre-Emptive Rights and the Controls Governing Their Waiver.
2. Disclosure and Transparency Requirements in the Subscription Prospectus.
3. Oversight of the Public Offering and Subscription Process by the Financial Regulatory Authority.

Fifth: Practical Challenges

Despite the legal framework, certain issues arise in practice, such as:

• The misuse of the waiver of pre-emptive rights to introduce specific investors;
• The pricing of newly issued shares below their fair value, to the detriment of existing shareholders; and
• The limited awareness of some investors of their legal rights.

Sixth: The Legal Framework Governing Subscription

The Egyptian legislator has regulated subscription in joint stock companies through a number of legal provisions, most notably:

Article (1) of the Egyptian Companies Law No. 159 of 198:

which defines a joint stock company as a company whose capital is divided into shares of equal value that are freely transferable.

Article (33) of the Companies Law:

which requires that the entire share capital be fully subscribed upon incorporation, with a specified portion to be paid in accordance with the Executive Regulations.

Article (35) of the Companies Law:

which provides that subscription shall be made on the basis of a prospectus containing the essential information relating to the company, in order to protect subscribers and ensure transparency.

Article (91) of the Executive Regulations of Law No. 159:

Which governs the procedures and conditions of subscription, as well as the information required to be included in the subscription prospectus.

Balance is further achieved through several provisions, including:

Article (16) of the Capital Market Law No. 95 of 1992:

Which mandates full disclosure when offering securities for subscription.

Article (17):

Which prohibits the offering of securities to the public except pursuant to a prospectus approved by the Financial Regulatory Authority.

Article (18):

Which affirms the liability of the issuing entity for the accuracy of the information contained in the subscription prospectus.

Conclusion

Subscription remains an effective mechanism for supporting the growth of Egyptian joint stock companies; however, its effects vary depending on the position of the investor, whether an existing or a new shareholder. Accordingly, ensuring fairness and transparency in subscription procedures is essential to maintaining market stability and safeguarding the interests of all parties involved.