At first, it can seem like the most secure plan: a group of family members and close friends decide to form a joint stock company, limited share company, or limited liability company. The partners conclude an agreement on the basis of mutual trust and belief in the success of the business plan. Companies Law No. 159/1981 stipulates that certain legal procedures be followed for capital increases and appointing the company’s manager. The Board of Directors must be elected annually by the shareholders, after which the BOD appoints the chairman. The company’s Articles of Association are also a binding, legal document; the violation of which can incur penalties ranging from small fines to the mandatory dissolution of the company. Often, partners disregard laws and regulations in favor of informal family negotiations and emails; an illegal practice that exposes the stakeholders to civil and criminal legal action, not to mention financial losses.
Before forming a company, each family member should individually seek legal counsel to determine the extent of their rights and responsibilities, as well the most appropriate position they should occupy in the company. Not all provisions of the Shareholders’ Agreement are enforceable, and appropriate legal counsel can draft the most suitable documents to protect the rights of the concerned parties. One should never assume that shared perspectives will remain as such. Before drafting the Articles of Association, the founders should choose a qualified attorney to guide them through the GAFI procedures and ensure that all necessary BOD meetings, EGMs, and OGMs are held at the appropriate times. It’s advisable that both the head of the BOD and the company’s managing director reside in Egypt, even if other shareholders live abroad.
But what are the procedures that should be followed if poor decisions and failure to take advantage of competent legal counsel have taken their inevitable toll? The immediate reaction of partners who feel that trusted friends or relatives have exploited them is to demand accountability and take civil action against the individuals that they believe are responsible. Civil suits however, are not the priority. The statute of limitations commences upon the injured party’s knowledge of the tortious act. The stakeholders’ concern; rather, should be to restore the company to compliance with all applicable laws and regulations. All communications between the partners, BOD, and managing director must be saved and documented. If the company has accounting deficits, a new accountant should be appointed to review past balance sheets and present a realistic outlook of the company’s financial future. This will allow the partners, in consultation with their legal counsel, to decide whether the company should be dissolved, restructured, or remain with a new BOD and managing director. A new BOD should be elected immediately, and all necessary OGMs and EGMs should be concluded. While Egyptian law permits limited voting by proxy, it is inadvisable to hold shareholders’ meetings in the absence of potential civil claimants or respondents. The final step is to attempt a mediated solution before undertaking expensive and lengthy civil claims in the Egyptian courts, which could last for years.