How to Change your company to Limited Liability Company

As the national economic development and constant development of investments are a robust motivation for the investment-based entities, this creates means to avoid termination of commercial and economic activity by investors and reduces the events of companies’ term termination or liquidation. These factors enable the investor to merge a company(s) into an existing company and transform them into other commercial forms. To this end, the investment-based authorities regulated the process of changing the legal form of a company to other legal commercial forms. Among the most cases of transforming the legal form are the limited liability companies, subject to the Egyptian Companies Law 159 of 1981 and the Executive Regulations thereof, and Law 4 of 2018, which we will cover briefly below in this article, and you can read it to know how to change your company to a limited liability company.

The concept of “Limited Liability Company” is defined in Egyptian Law, under Article 4 of Law 159 of 1981 as follows: “A company of which partners may not exceed fifty partners, where each of them is liable only to the extent of their share in the company.”

A limited liability company is a type of trust company that combines characteristics of partnerships, in terms of easy and simple procedures, and advantages of trust companies, in terms of the partners’ responsibility. The limited liability company is not formed on the financial consideration of partners, despite being a trust company, however, its money is divided into shares and not stocks, and is managed by a manager and not a board of directors, as it is closer to a limited partnership; where the partners have such immunity as that of silent partners, and its shares can be negotiated among the partners easily and can be managed through a single manager; where any partner can manage it and transform it into a joint-stock company or a one-person company. This type of company is the proper option for a small number of partners; as the minimum number is (2) founders and the maximum is (50) founders. In addition, the partners' responsibility is personal, as they are only accountable for their shares respectively.

The partners in the limited liability companies may change the legal form of the company due to circumstances arising during the term of the company and their desire to continue it, not to dissolve or liquidate it, they, instead, find their way to change the legal form of the company.

Among the most important events requiring changing the company's form are:

1. Changing the company’s form to change the activity or to practice a specific activity (as the Companies Law limited the practice of some activities to certain types of companies, where banking, loan, investment, insurance, and savings companies may not have the form of a limited liability company).

2. Changing the company’s form to adjust its situation instead of liquidation or dissolution (change in the financial quorum).

3. Changing the form of the company due to the change in the legal quorum of partners, including minimum and maximum quorum.

If the legal quorum of the partners exceeds 50 partners (as in inheritance) or if the legal quorum is less than two partners, including as a result of the death of one of the partners and the reluctance of the heirs to enter as partners in the company, the legal form of the company shall be changed.

• Conditions and procedures for changing the legal form of the company:

1. Form change shall be made by a decision issued by the extraordinary general assembly or partners by a majority of three-quarters of the partners and the capital.

For this purpose, “Majority” means a numerical majority of the partners or shareholders, and a majority of owners of three-quarters of the capital.

- This is a prerequisite, as changing the company’s legal form results in changing its provisions while retaining its legal personality. This requires a numerical majority and a majority for the capital, unlike the amendment of the memorandum of association (MoA) that requires only a numerical majority, under Article 127 of Law 159 of 1981.

 1. The Committee examining the applications for company incorporation, as provided in Article 48 of the Executive Regulations, is responsible for approving the change of the legal form as outlined in Article 299 of the same Regulations.

3. according to Article 299 of the Regulations, the procedures, and conditions of incorporation of the company to which the change is to take place shall be observed, excluding:

a) Execution of a preliminary MoA, meaning that execution of a new MoA is not required, but only the amendment of the existing MoA.

b) Determination of the company's net assets, according to the company’s books and financial statements, which shall be approved by an auditor registered in the register of professional accountants and auditors, for no less than ten years. Also, the Authority shall be notified of such determination. If no objection is received by the Authority within a week, it shall be then valid and enforceable.

c) Meeting of founders ( Constituent Assembly); the decision of the partners or the extraordinary general assembly that decided to change the company’s legal form shall include the approval of the memorandum or articles of association and selection of the first board of directors and the auditor.

Article 136 of the Egyptian Companies Law 159 of 1981 stipulates that:

- The legal form of partnerships limited by shares or limited liability companies may be changed by a decision issued by the extraordinary general assembly or the partners by a majority of three-quarters of the capital, as the case may be.

- Accordingly, after incorporation, the company may select a legal form other than the legal form on which it was incorporated, provided that it is appropriate for the company’s activity.

- This is regulated under Article 129 bis-7 of Law 4 of 2018, which stipulates that:

- Joint-stock companies, partnerships limited by shares, and limited liability companies, may, in the case where the number of founders or partners is less than the minimum number prescribed by law if they failed to settle their status within 6 months, be transformed into a one-person company (OPC), unless it is engaged in one of the prohibited activities to be practiced by OPCs.

- It is worth noting that changing the legal form of the company may not result in the termination of its legal personality, unlike a merger, which results in the termination of the legal personality of the merged company.

• An objection of some partners to the Legal Form Change Decision:

If some partners objected to the legal form change decision, or if they did not attend the extraordinary general assembly or the meeting of partners.

The Egyptian legislator regulates the provisions for the partners’ objection to the change decision, as stipulated in the Executive Regulations (Article 295 and Article 298) and the Companies Law (Article 135 and Article 136), stipulates as follows:

Partners or shareholders who object to the legal form change decision, or who did not attend the extraordinary general assembly or the meeting of partners with an acceptable excuse, may submit to the board of directors or the company director, by a registered mail, indicating the nature of the excuse. The letter shall include their desire to exit from the company, and the number of shares or stocks they hold. The board of directors or the director shall notify the objecting partner or shareholder, by a registered mail, within 15 days from the date of receiving the letter, of acceptance or rejection of such excuse per such policies as set by the company.

• In the event of a dispute arising, the matter shall be referred to the competent courts for consideration.
• The request to exit and redemption of the shares or stocks shall be answered within 30 days from the date of the change in the legal form of the company.
• Valuation of the value of shares and stocks; the value shall be determined based on the current value of all the company's assets. The value of the shares shall be paid to their holders before the change is completed.
• In no agreement is reached on the value, the partners or shareholders may resort to the court, to value such shares or stocks.
• The court shall order compensation to the stakeholders, if necessary, and the awarded amounts shall have a priority over all the assets of the company.
• Companies decided to change their legal form and their partners shall be exempted from all applicable taxes and fees for changing the legal form of the company. However, this exemption shall apply to such companies subject to Law 159 of 1981, under one of the other forms as set out in the same law, excluding the partnerships).

The effect of changing the company’s legal form on the rights of creditors:

Article (136) stipulates that: Changing the legal form of companies may not result in a violation of the rights of creditors.

Article (298) of the Executive Regulations of the Companies Law stipulates that:

- A creditor with a right against the change targeted company, before completion of the change procedures, may seek the competent court to award him guarantees against the target company, where serious considerations justifying the same do exist.

- If the court decided not to expedite the payment of the debt or establish sufficient guarantees, the assets of the limited liability company shall be as a guarantee for the payment of the debt along with the interests.

Changing the form of the limited liability company when the number of partners exceeds fifty partners:

- Article 60 of the Executive Regulations of the Law provides that:

- Where the number of partners exceeds fifty partners due to inheritance, will, or sale of shares by forced selling, the partners shall reconcile their status in line with the provisions of the law in this regard, within one year from the date of the increase, or take measures to change the company’s legal form into a joint-stock company. If the company fails to do so, any stakeholder may request the dissolution of the company by a court ruling.

- The procedures for changing the form of the said company shall be followed.

- The purpose of the provision to change the company’s form to a joint-stock company is because the selection of the joint-stock company is based on that it is a form of company that is subject to the Companies Law 159 of 1981, not without the relation to the partners’ freedom to select a form subject to other laws regulating some companies.

- Therefore; the limited liability company may be subject to change the legal form to any other legal form, provided that the procedures for changing the form of such company shall be followed.

- The unanimous approval of the partners is required, in the event of selecting one of the forms of partnerships due to the increase in the burdens of the partners due to the unlimited liability of the partners in such companies.