Bank Asset Carveouts in Egypt: Navigating Legal Complexities

For a host of reasons, a bank may decide to carve out part of its business in one or more markets without fully exiting them. These reasons include offloading non-core assets and slashing/reducing regulatory compliance burdens. This may be a result of a global strategic review or a market-specific exercise.

From our experience, the main reason for a bank to retain part of its business in a particular market is to continue serving multinational companies in that market. Bank asset carveouts are therefore more frequently seen where a bank sells its consumer/retail business and retains its corporate/institutional business in a market.

Under Egyptian law, a bank asset carveout is mainly achievable by way of an asset transfer.

Generally, asset transfers are known to be more complex compared to share transfers, because each asset category often has its own transfer mechanism. A bank asset carveout poses additional layers of complexity.

With a focus on the Egyptian market, we highlight below some of the distinctive challenges that a bank asset carveout poses in practice.

Transfer of customer agreements

Template customer agreements used by banks (e.g., bank account opening forms, deposit agreements and facility/loan agreements) usually give the bank the right to assign its rights and obligations under such agreements without the need to obtain the customer’s consent. When it comes to assignment of obligations, however, some Egyptian jurisprudence suggests that in order to ensure the enforceability of the assignment, the consent of the counterparty is required following its notification of the identity of the new obligor.

The pragmatic approach in this context, however, is to timely inform customers about the proposed transaction through a series of communications and offering them clarity on the steps to be taken to ensure a smooth transition.

Securities and collection litigation

The typical protection for a bank if a customer defaults is to file a court case to collect the outstanding dues.

Additionally, whether for a loan or credit card, banks usually take securities from customers, including commercial papers (e.g., promissory notes) and, for car loans, restriction on sale of the financed car.

The rights to pursue these collection litigation cases or enforce such securities are unlikely automatically transferrable. This dictates the need for devising tools to enable the buyer to enforce, and receive the benefits of, such protections. One of such tools is for the seller to issue a power of attorney in favor of the buyer. Also, post-closing cooperation between the parties and further assurances are inevitable in these types of transactions, so this should be entrenched in the transaction documents in reasonable detail.

Frozen accounts

Some customer accounts may be subject to freezing orders issued by relevant governmental authorities pending investigation or judicial process.

Depending on their size relative to the entire transferring consumer business, these are usually dealt with after closing as it may take time until they can be legally transferred. This reinforces the need for detailed obligations on the parties to continue cooperating after closing.

Bancassurance

If a bancassurance arrangement is part of the transferring assets and the acquiring bank already has one or more bancassurance arrangements with other insurers, the acquiring bank should consider whether the onboarding of the transferring arrangement would run counter to the contractual provisions (including exclusivity) regulating the existing arrangement(s) with the acquiring bank.

In addition, parties to the transaction should pay attention to any applicable regulatory restrictions on the number of insurers a bank may deal with, and to whether any potential overlap could arise in the categories of products/services that may be offered by insurers through the same bank.

Other considerations

Migration of customer accounts to the acquiring bank’s systems and onboarding of transferring customers require continuous cooperation between the parties to ensure smooth transition.  This can be achieved through the creation of one or more dedicated committees/teams representing the buyer and the seller.

Besides, some assets, resources and services may be used by both the consumer and the corporate businesses of the selling bank. Some of these may even be used by other banks in the seller’s corporate group.

A transitional services agreement is usually employed to ensure that the migration and shared assets, resources and services are appropriately addressed and handled until the acquiring bank is in a positing to fully integrate the newly acquired business.   

To conclude, a bank asset carveout is a complex type of M&A. It requires careful planning and attention to detail, as well as specialized experience and expertise. If you have any questions or require any assistance, please feel free to reach out to: Muhammad Nassef, Omar Adel.