Aside from notification thresholds change of control requirements are used to limit merger control notification obligations to transactions that potentially impact competition. Pure change of control regimes may not catch all relevant transactions. Even where a party does not have control over an undertaking, they may still be able to influence the operations of the undertaking. Such influence could be relevant from a competition law perspective. Therefore, many jurisdictions apply a decisive or material influence test instead of a pure change of control test. The Egyptian merger control regime includes a material influence test. This material influence test is particularly broad compared to other jurisdictions. This client brief discusses the Egyptian material influence test as well as means of control considered by the Egyptian Competition Authority (ECA).
Egyptian law requires notification of economic concentrations that lead to a change in control or material influence over an undertaking. Since material influence establishes a lower threshold, transactions that lead to a changes of control will typically also lead to acquisition of material influence. Hence, the change of control criterion has limited practical application next to the material influence criterion. Still, control may be established by means other than majority shareholding, voting rights, or other shareholder rights. Such other means of control include control through contractual arrangements or de facto control. Specifically:
- Control through management agreements (i.e. private equity structures) — PE firms typically do not acquirer shares or interest in their portfolio companies. Instead, the control portfolio companies through management and advisory agreements they conclude with the funds that own the portfolio companies. These agreements may include rights to approve budgets, business plans, appointment and removal of management, and other strategic matters as well as board representation.
- Control through licensing agreements — licensing of IP rights including the rights to distribute, manufacture, or market a product, often accompanied by approval over pricing, marketing strategies, and sales channels may be deemed a change of control over an undertaking.
- Control through financial dependence — lenders and financial institutions may acquire control over a borrower by inserting rights that allow them to monitor and intervene in the operations of the borrower. Such rights may include rights to approve key operational decisions of the undertaking, such as restructuring, asset sales, or management appointments. Lenders may also have veto powers over important financial transactions, such as mergers, acquisitions, or investments, or the ability to influence strategic decision-making through board representation or observer rights.
- Control through supplier or distributor relationships — in some cases, a supplier or distributor relationship can grant significant influence over an undertaking's decisions. Exclusive supply agreements can give one party leverage in setting prices or dictating market strategies, effectively giving them control over part of the business operations. Strategic alliances, where one company has exclusive rights over key components or markets, can also allow them to dictate terms of the business's performance and thereby exercise control over the undertaking.
- Control through overlapping business relationships — strategic partnerships between firms in the same industry may allow one party to guide market behavior of thus exercise control over the other.
Material influence under Egyptian law
The Egyptian Competition Law defines control as the ability to exercise decisive influence over an undertaking's strategic decisions, which can be achieved through various means, not limited to shareholding. Material influence refers to the capacity to affect an undertaking's strategic decisions or commercial objectives, directly or indirectly. The Egyptian merger control regime provides specific thresholds for what constitutes material influence. Material influence within the meaning of the Egyptian merger control regime is acquired, where a—natural or legal—person:
- acquirers 25% or more in an undertaking;
- acquirers between 10 and 25% in an undertaking and at least one
of the following additional criteria is fulfilled:
- the distribution of voting rights in the undertaking is so fragmented, that the acquirer can still influence strategic decisions and business objectives of the undertaking despite holding a stake of less than 25%;
- the acquirer obtains additional privileges concerning decision making in the undertaking such as special voting powers and veto rights;
- common shareholding or common shareholders between the acquirer and the undertaking; or
- the acquirer gaining the right to appoint one or more persons to the board of directors or a similar body of the undertaking; or
- acquirers less than 10% in an undertaking, thereby becomes one of the three largest stakeholders in the undertaking, and at least one of the aforementioned criteria is fulfilled.
This understanding of material influence is broad comparatively. Furthermore, merger control regimes that include similarly broad understandings of material influence, such as the German merger control regime have introduced measure to mitigate excessive application of the merger control regime. Egypt's merger control regime currently lacks such limiting measures. Hence, even small stake acquisitions with the acquirer gaining only comparatively minor rights in respect to the undertaking may trigger a filing obligation in Egypt. Consequently, parties contemplating transactions with exposure to Egypt will need to carefully examine their obligations under the Egyptian merger control regime.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
