Chapter One: Credit Granting Controls

Part Three: Banking Financing Controls for the Acquisition of Companies and Valuation of Goodwill

First: Controls for the Valuation of Goodwill

Article (One)

In determining the net assets of companies for the purpose of granting credit:

-1 Internally generated goodwill resulting from the restructuring of companies belonging to a single group shall not be recognized.

-2 If the goodwill value results from an acquisition between two unaffiliated companies, the goodwill shall be recognized as follows:

(a) If the acquisition is through a strategic investor — meaning the acquiring company operates in the same field of activity as the acquired company or integrates vertically with it — the full value of the goodwill may be recognized.

(b) If the acquisition is carried out through direct investment companies or funds, special purpose acquisition companies, or companies operating in the venture capital field — the recognized amount shall not exceed 50% of the goodwill value.

Article (Two)

In applying the provisions of Article One, banks must observe the following:

-1 The valuation must show the fair value of all asset and liability items separately, including potential or determinable liabilities, taking into account the effects of annual impairment testing of goodwill.

-2 The valuation of the aforementioned assets and liabilities must have been conducted by authorized entities with expertise in the field of valuation and in accordance with Egyptian Accounting Standards or International Financial Reporting Standards (IFRS) regarding the recognition of intangible assets.

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Letter from Mr. Sayed, Deputy Governor of the Central Bank, issued on January 25, 2009 (Central Bank Board of Directors Decision No. 104/2009 at its meeting held on January 6, 2009).

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Article (One)

The provisions of this decision apply to banking financing granted for the purpose of full or partial acquisition of companies. Acquisition, in the application of the provisions of this decision, means the acquiring company owning more than 50% of the shares of the target company or any percentage thereof that gives it direct or indirect control over the decisions of the board of directors or the general assembly of the target company.

Article (Two)

Subject to the previously issued controls and rules of the Central Bank of Egypt regarding the financing of share companies and granting credit, the bank wishing to grant financing for the purpose of acquisition must observe the following controls and rules:

-1 The bank must have an approved policy from its board of directors regarding financing the acquisition of companies.

-2 Sufficiency of cash flows necessary to repay the financing, whether from the acquiring company, the target company, or the new company resulting from the merger.

-3 Conducting comprehensive financial and legal due diligence on the target company through specialized financial and legal consulting firms with experience in this field. The financial audit must be based on complete financial statements prepared in accordance with Egyptian Accounting Standards or International Financial Reporting Standards (IFRS).

-4 The bank must conduct financial analysis studies of the acquisition process in light of the results of the financial and legal audit, as well as prepare a specific valuation report for that purpose.

-5 In cases of acquisition through shares traded on the Egyptian Exchange where comprehensive legal and financial due diligence cannot be performed for legal, regulatory, or procedural reasons, the bank may rely on available financial reports and studies and published information about the company.

-6 The bank may engage an external entity with expertise in the field of activity of the target company to verify its valuation in cases it deems appropriate, relying on multiple valuation bases.

Letter from Mr. Sayed, Deputy Governor of the Central Bank, issued on March 7, 2016 (Central Bank Board of Directors Decision at its meetings held on March 2-3, 2016).

Article (Three)

The weighted risk is increased when calculating the bank's capital adequacy ratio as follows:

a- 200% for acquisitions through a strategic investor, meaning the acquiring company operates in the same field of activity as the target company or integrates vertically with it.

b- 400% for acquisitions carried out through direct investment companies or funds, special purpose acquisition companies, or companies operating in the venture capital field.

Article (Four)

Total financing for acquisition purposes shall not exceed 2.5% of the bank's total loan portfolio at the time of granting, and the limit for financing a single client and related parties shall not exceed 0.5% of the bank's total loan portfolio.

Furthermore, the total value of financing provided through banks operating in the Arab Republic of Egypt for the purpose of financing a single acquisition shall not exceed 50% of the value of the operation, for new operations — excluding guarantees issued within the framework of tenders for companies listed on the Egyptian Exchange — and in case the bank wishes to increase this limit, it may submit a request to the Central Bank of Egypt for approval of such increase.

Article (Five)

Banks are committed to Central Bank of Egypt Board of Directors Decision No. 104 dated January 6, 2009, regarding controls for the valuation of goodwill.

Article (Six)

The controls and rules contained in this decision apply to acquisition operations from the date of entry into force of its provisions. Banks that have financed acquisition operations prior to this date must regularize their status according to its provisions within 6 months from the date of its entry into force.