By the book: New foreign investment rules have tangible effects

As a market of about 37m inhabitants with substantial energy resources and steady demand for modern infrastructure supported by public investment, Algeria has been attracting strong foreign investor interest. During 2009, in the context of the global economic crisis, Algeria saw a fall in revenues from its oil and gas exports combined with a sharp rise in imports of goods and services and the dividends distributed to foreign investors. The combination of these three factors has led to a deterioration in the balance of payments and prompted the government to amend the regulations overseeing foreign investments by limiting the participation of foreign shareholders in Algerian companies. After the enactment of laws in 2009 and 2010, there were no significant new laws introduced affecting the foreign investment regime. Only the recent Finance Law for 2012 has clarified that the transfer of shares between directors of joint stock companies does not trigger the obligation for the concerned company to comply with the foreign shareholding rule.

INVESTMENT LAW: The foreign investment regime was affected the Complementary Finance Law for 2009 (2009 CFL), of which the most important provisions are:

• The limitation of foreign ownership to 49% in any foreign investment (70% for import companies). This means that foreign investors are now obliged to create joint ventures in which Algerian partners hold the majority stake;

• The obligation to obtain the authorisation of the National Investment Council prior to any foreign investment;

• The requirement that any foreign investment generate a positive foreign currency balance in favour of Algeria throughout its realisation, the idea being that only the projects for which the inflows of foreign currency exceed the outflows may be authorised to distribute dividends. The Complementary Finance Law for 2010 (2010 CFL), published on August 29, 2010, confirms the approach laid out by the government in the 2009 CFL.

QUESTIONS ABOUT RETROACTIVITY OF THE RULE: undefined The 2009 CFL introduced (in Article 58) the obligation for foreign investors to invest in partnership with one or several Algerian shareholders, holding at least 51% of the share capital (or 30% for activities of import for resale). There were some doubts as to this obligation’s applicability to investments realised before 2009; the question was whether companies incorporated before the 2009 CFL and 100% owned by foreign shareholders had to bring themselves into compliance with the new 49/51 rule when modifying their trade register or upon a change in their capital ownership.

CLARIFICATION: This issue has been clarified by the publication of the 2010 CFL. Pursuant to Article 45 thereof, “Any modification of the trade register leads to the prior bringing into compliance of the company with the rules governing capital ownership.” Not subject to this obligation are the modifications relating to:

• Modifying the share capital (increase or decrease) without entailing a change in the proportions of allocation of the share capital as specified above;

• The transfer or exchange between former and new directors, of guarantee shares provided by Article 619 of the Commercial Code, provided that the value of those shares does not exceed 1% of the company’s share capital;

• The removal of an activity or the addition of a connected activity;

• Modifying an activity further to the modification of the nomenclature of activities;

• Appointing the company’s managers (dirigeants);

• Changing the registered office. The National Centre of Trade Registry has not been precise on the notion of “connected activities”, but on the basis of several informal meetings held with the centre, they belong to the same economic class or sector.

According to a literal interpretation of this provision, the only event that gives rise to an obligation to bring into compliance with the 49/51 rule is “the modification of the trade register”. The transfer of shares of an Algerian company does not lead to a modification of its trade register, so that it could in theory be argued that the mere transfer of shares (as opposed to a share capital increase) would not create an obligation to bring the company retroactively into compliance with the rule set out in the 2009 CFL.

However, it seems clear that the spirit of this provision is that any change in the ownership structure of a company incorporated before the 2009 CFL gives rise to a requirement to bring the company into compliance with the 49/51 rule as of that date.

From a practical point of view, the notary in charge of drafting the deed of sale should normally check whether the contemplated sale would lead to noncompliance with the 49/51 rule, and refuse to assist with the process should this be the case.

STATE’S RIGHT OF PRE-EMPTION: The amended right of pre-emption of the state, applicable to any sale of shares in an Algerian company to or by a foreign shareholder (see below), results in the Ministry of Investment being informed in advance of such sale so that it would have the possibility to intervene should the contemplated sale not comply with a 49/51% split.

In this regard, as mentioned in the introduction, the Finance Law for 2012 now allows the transfer of the “guarantee shares” of the directors. More precisely, Article 63 of the Finance Law for 2012 specifies that the modifications to a company’s trade register further to a “sale or exchange between former and new directors of guarantee shares provided for in Article 619 of the Commercial Code” shall not trigger the 49/51 and 70:30 allocation rules, provided that the value of such shares does not exceed 1% of the company’s share capital. However, an issue remains regarding the transfer of guarantee shares between directors: the state’s right of pre-emption. As underlined above, the sale of shares in an Algerian company is compulsorily made before a notary and embodied in a notary deed.

Besides, any sale of a participation in an Algerian company by or to a foreign shareholder requires, subject to nullity of the sale, the prior delivery of a certificate from the Ministry of Investment after deliberation of the State Shareholdings Council attesting to the waiver by the state of its pre-emption right over the sale. Still, the regulatory texts necessary for the implementation of the state’s right of pre-emption (pertaining notably to the sample of form to be used by the notary to file the application for the delivery of such waiver certificate, the price at which the state could exercise its pre-emption right, etc) have not been enacted yet.

In addition, pursuant to the regulations, the absence of an answer from the competent services of the Ministry of Investment within a one-month period from the filing by the notary of the application for the waiver certificate shall be deemed as a waiver of the state’s right of pre-emption except when the transaction meets the following conditions: (i) exceeds an amount defined by an order from the Ministry of Investment; (ii) concerns the shares of a company carrying out any of the activities defined in an order.

The above order has not yet been enacted by the Ministry of Investment. Hence, as of today, there is an uncertainty as regard to effect of the silence of the Ministry of Investment at the expiry of the above one-month period and if this silence can be considered as being a waiver of the state’s right of pre-emption. As a result, in practice, from a legal standpoint it could be argued that the notaries are not able to validly perform any sale of shares involving foreign investors without applying for the waiver of the state pre-emption right.

IMPLEMENTATION: In this respect, the Finance Law for 2009 does not deal with the practicalities regarding the implementation of the state’s right of pre-emption pertaining to the transfer of shares between directors. As a conclusion, if the sale of guarantee shares does not trigger the 49/51 rule according to the conditions mentioned above, such a sale still remains subject to the right of pre-emption.

However, the clarification brought by the Finance Law for 2012 is incomplete since there is still a question as to whether the state’s right of pre-emption is triggered or not. Given this doubt, it will still be necessary to notify the relevant department of the Ministry of Investment when a share must be transferred between a former director and a replacing director. CLARIFICATION OF THE NOTION OF POSITIVE FOREIGN CURRENCY BALANCE: According to Article 4, paragraph five of Ordinance 01-03, this relates to the development of investment from the 2009 CFL: “The foreign investment, direct or in partnership, shall generate a positive foreign currency balance in favour of Algeria, throughout the realisation of the project. A regulation of the monetary authority will ensure the practical implementation of this.”

Article 2 of Regulation No. 09-06 of Bank of Algeria dated October 26, 2009 (hereinafter Regulation 09-06) defined the notion of “foreign currency balance” for any project as established by taking into account the following credits and debits elements: Regarding credits (the incoming foreign currency flows on Algerian territory) the repatriation from:

• Any contribution linked to the investments, including the share capital;

• The part of the production sold on the national market in substitution of imports;

• Goods and services export revenues;

• Foreign loans exceptionally raised. In addition to these elements must be added the valuation of any contribution in kind. With regard to debits (i.e., the outgoing foreign currency flows) the transfers abroad resulting from:

• The import of goods and services;

• The profits, dividends, the directors’ percentage of profits, the directors’ fees, the wages and bonuses of the expatriate employees;

• The partial transfers of investments;

• Exceptional foreign debt charges;

• Any other foreign payments. The foreign currency balance is constituted by the difference between the sum of the credits and the sum of the debits. The foreign currency balance must be presented in its equivalent value in Algerian dinars. The idea behind this obligation is that only investments for which the inflows of foreign currency exceed the outflows may be authorised to distribute dividends and possibly to repatriate sale proceeds. The practical application of this provision is still unclear one year after its introduction. Indeed, in our experience, companies created before the introduction of the 2009 CFL have been able to transfer dividends abroad until now, without any check being carried out as to the existence of a positive foreign exchange balance by the authorised intermediary or by the Bank of Algeria. However, this position may change at any time. It should be underlined that “the part of the production sold on the national market in substitution of imports” is to be included in the credit side of the foreign currency balance. Therefore, if a joint venture’s activity is one of production, this will help to maintain a positive foreign currency balance, thus allowing the distribution of dividends.

OBLIGATION TO RESORT TO LOCAL FINANCING: undefined According to Article 4 bis paragraph six of Ordinance 01-03 (resulting from the 2009 CFL): “Any foreign investment, direct or in partnership, shall – save the constitutive capital – raise exclusively on the local financial market the funds required for its execution, except in particular cases.” From a literal interpretation of this provision – this has not been clarified or otherwise commented on by the authorities – Algerian companies wholly or partly owned by foreign shareholders (considered as foreign investments) should no longer be able to receive loans from foreign parties (neither banks nor shareholders). The Bank of Algeria issued a note, dated December 9, 2010, by which it made clear that shareholders’ loans granted by foreign shareholders to Algerian companies were not allowed. It also demanded that such shareholders’ loans already granted be capitalised by December 31, 2010 at the latest. Since this date, it has no longer been possible for foreign shareholders to grant loans to their Algerian subsidiaries.

FINANCIAL MODALITIES: Another major change resulting from the 2010 CFL is the financial modalities for the exercise of the new right of pre-emption.

Under the new right of pre-emption, the price at which the state may exercise its right is to be fixed through an expert valuation. The modalities of such expert valuation are to be specified by a forthcoming regulation. This raises questions as to whether or not the seller, who had planned to offer a number of shares at a certain price, could be obliged to sell at the price determined by the expert, which could be lower than the expected price.

On the one hand, a negative answer would imply that Article 46 of the 2010 CFL only intended to give the state priority negotiation rights. This would, of course, seem contradictory to the terms “right of preemption” used in the law. Nevertheless, a positive answer would mean that this provision would have created a case of forced sale. The legality of such a forced sale would likely be brought into question.

This issue may be clarified by the implementing regulation to come. Finally, it should be noted that, even when expressly waiving its right of pre-emption, the state retains the right to pre-empt during one year following the sale in case the price is deemed insufficient ( Article 118 of the Code of Registration). In such a case, the state could only buy the shares from the acquirer by paying the price paid by the latter, plus 10%. REPURCHASE RIGHTS OF THE STATE IN THE CASE OF AN INDIRECT SALE: The state has the right to purchase shares of an Algerian company in the event of a total or partial sale of the shares belonging to its foreign parent company. According to Article 47 of the 2010 CFL, any transfer of shares in a foreign firm holding shares in an Algerian company which has benefitted from advantages at the time of its establishment, is subject to “governmental consultation” and gives rise to a “right to repurchase” by the state. This provision refers to a situation in which the shares of the parent company holding a stake in an Algerian company are sold. The shares of the underlying Algerian company are not the objects of the transaction.

It should be highlighted that the state’s “right to repurchase” is limited to the shares of Algerian companies that have benefitted from advantages (that in the absence of further specifications, may include: tax and Customs exemptions, granting of a land concession, etc, by the current investment agency, National Agency for Investment Development [Agence Nationale de Développement de l’Investissement, ANDI] but also the former one, the Investment Promotion Agency).

From a literal interpretation of the provision, it appears that only the sale of shares in a foreign company holding a direct share in an Algerian company (parent company) is targeted under the law.

In our view, however, such right to repurchase should be extended to cases involving the sale of shares abroad occurring at the level of the parent company and beyond. Should a different interpretation be accepted, it would be easy to circumvent the state’s right to repurchase by interposing different levels of companies.

UNDEFINED CONSEQUENCES: Article 47 of the 2010 CFL does not specify the sanction that would be applied in the event that a transaction involving the shares of an Algerian firm’s parent company occurs without any prior consultation of the government. In this respect, the timeframe and process for the “prior consultation of the Algerian government” is not indicated within the body of the law. It is worth noting that this obligation seems especially difficult to apply with respect to those companies whose shares are listed on a stock exchange.

STATEMENT OF FOREIGN SHAREHOLDERS: Article 48 of the 2010 CFL creates an obligation upon foreign entities holding shares in companies established in Algeria to communicate the list of their shareholders as certified by the services in charge of the management of the trade register of their country of residence. This communication must occur on an annual basis, according to Article 48 of the 2010 CFL.

Like Article 47, this provision does not contain any indication of the sanction applicable in the case of non-compliance. It is noteworthy that this regulation is only concerned with shareholder changes and not with the increase or decrease of their participation.

This provision appears as a means to ensure the enforcement of Article 47 of the 2010 CFL, and to allow the authorities to carry out ex-post-facto checks as to compliance with the obligations therein.

REINVESTMENT OBLIGATION: Article 142 of the Direct Tax Code (DTC) provides that a company benefitting from exemptions or reductions of the tax on corporate profits as a result of the ANDI regime must reinvest in Algeria the “part of profit that corresponds to these exemptions or reductions”, within four years of the end of the fiscal year of such favourable regime.

This reinvestment may intervene: (i) either as per each fiscal year; or (ii) as per several consecutive fiscal years. In this case, the four-year period starts as from the end of the first fiscal year. In the case of non-compliance with these provisions, the company shall not only be made to repay the taxes from which it was exempted in application of the ANDI regime but also pay a penalty amounting to 30% of said taxes.

Article 57 of the 2009 CFL provides that “in addition to the provisions of Article 142 of the DTC, the companies which benefit from exemptions or reductions as regards any duties, taxes, Customs taxes, and other levies as a result of the investment incentives regime, must reinvest in Algeria the part of the profits corresponding to these exemptions or reductions, within four years as from the end of the fiscal year during which the favourable regime applied.”

These provisions extend the obligation of reinvestment to all the tax advantages granted to a company under the ANDI regime. However, this is not the case for Article 142 of the Algerian DTC, which only provides for the reinvestment of the corporate tax exemption or reduction.

The modalities of reinvestment and the sanctions implemented in the case of non-compliance under Article 57 of the 2009 CFL are the same as those provided for by Article 142 of the DTC.

It is worthwhile to note that the finance law for 2013 that is currently being reviewed by the members of the Algerian parliament includes provisions that would exempt from this reinvestment obligation Algerian companies (including joint ventures with foreign investors) operating in some strategic sectors.

PUBLIC PROCUREMENT CONTRACTS: Algeria’s Public Procurement Code (PPC) is governed by Presidential Decrees No. 10-236 of October 7, 2010 as amended by Decrees No. 11-98 dated March 1, 2011, No.

11-222 dated June 16, 2011 and Decree No. 12-23 dated January 18, 2012.

According to Article 2 paragraph one of the PPC, state-owned companies (entreprises publiques économiques) or public establishments which are not responsible for the realisation of an operation either fully or partly, temporarily or permanently funded by the state’s budget are not directly subject to the PPC.

However, according to paragraphs two and three of Article 2 of the PPC,”State-owned companies and public establishments which are not subject to the provisions of the present decree in accordance with the last point mentioned above shall adapt their own procedures to the Public Procurement Code and have them validated by their corporate bodies. In such case, the Council of State Shareholdings for state-owned economic enterprises, and the competent minister for public establishments, shall create and approve a system of external control of their public contracts.

In such a case, the Council of State Shareholdings and the competent minister, each in their own area, may, in case of imperious necessity, derogate from certain provisions of the present decree.” As a result, a state-owned company, even though it is not directly submitted to public tendering rules because it is not in charge of the realisation of an operation fully or partly funded by the state’s budget, will now be obliged to adapt these rules internally and to comply with them when entering into contracts with private operators (i.e., to resort to competitive bidding processes).

The Participation Council of the Algerian State has detailed the external control of public procurement contracts under its Resolution No. 21/125/10/04/2012 dated April 1, 2012 relating to the external control of the public procurement contracts concluded by state-owned companies and to the mutual agreement procedures within a group of companies.

PREFERENCE MARGIN OF ALGERIAN PRODUCTS & SERVICES: The PPC strengthened the existing provisions intended to favour Algerian bidders.

Thus, Article 23 of the PPC now provides for a preferential margin of 25% (as compared to 15% previously) for the products of Algerian origin and/or for enterprises organised under Algerian law with share capital held in majority by resident nationals.

The manner in which this preference margin will be applied has been stated by a ministerial order of the Ministry of Finance dated March 28, 2011 related to the modalities of the application of the margin of preference to products of Algerian origin and/or enterprise of Algerian law: relating to supply procurements, the preference margin of 25% is granted to the products of Algerian origin, locally manufactured, upon presentation of a certificate of Algerian origin by the tenderer; and relating to procurements of works, services and design, the preference margin is granted to enterprises or design offices of Algerian law and to mixed groups (i.e. comprising both Algerian and foreign members) up to a limit of the part owned by the Algerian enterprise in the group. This preference margin is only reserved for local Algerian entities, natural persons or legal entities whose share capital is predominantly held by Algerian national residents.

According to Article 23 of the PPC, for mixed groups, parts owned in the group by Algerian and foreign enterprises are determined in reference to the works to be performed by each member and their related amount.

In practice, this part is principally determined in regard to the amount of the works performed by each member. However, it is requested that each member performs a determined and identifiable job.

This preference margin applies at the financial offer valuation stage. In addition, the currency of the contract does not impact the application of the preference margin, as this implementation depends only on the nationality of the tenderer.

INTERNATIONAL TENDERS: According to Article 24 of the PPC, in the event of international invitations to tender, the foreign tenderer can be obliged, within the framework of its response to the invitation to tender, to make a commitment to invest in Algeria, in the same area as the subject of the contract, through a partnership with an Algerian company in which capital is mainly held by national residents.

For contracts submitted to the obligation of investment of the foreign tenderer, under the provisions of Article 24 paragraphs three to five of the PPC, the obligation of investment does not apply to all international invitations to tender. Rather it applies only to those designated by a decision of the relevant authority.

Thus, should the specifications of an invitation to tender not require such a commitment, the foreign tenderer would not be subject to the obligation to invest. To date, it remains that no decision on this matter has been made by the relevant authorities and there is still an uncertainty regarding the invitations to tender submitted to this obligation.

In this context, one could argue that in the absence of any decision of the relevant authority with regards to international invitations to tender (subject to the obligation of investment), a foreign tenderer should not be obliged to undertake an investment commitment.

Also, it should be noted that contracts directly awarded (without call for tender, the so-called gré à gré procedure) are not subject to these provisions (Article 27 of the PPC). This obligation seems to apply to a foreign tenderer only; an Algerian tenderer held by foreign capital would not be concerned. INVESTMENT IN PARTNERSHIP AS A CONDITION OF THE OBLIGATION OF INVESTMENT: In the second paragraph of Article 24 of the PPC, the foreign tenderer must commit to invest “in the context of a partnership, in the same area of activity as the subject of the contract, with one or several enterprises subject to Algerian law, the share capital of which is held in majority by national residents”.

Nevertheless, the notion of partnership is not defined by the PPC, which is a source of questions as to what is actually meant by partnership. However, under the provisions interesting the foreign investors in Algeria and in particular those of the CPLs for 2009 and 2010, it could be supported that the notion of partnership targeted by these provisions should cover the creation of a joint venture between the foreign tenderer and one or more Algerian resident investors.

TERMS OF THE INVESTMENT COMMITMENT: The investment commitment of the tenderer must be included in the offer of the latter and must respect a strict model set by the minister of finance decree dated March 28, 2011 determining the model of investment commitment. This commitment should also be accompanied by a schedule and the methodology of implementation of the investment. The name of the Algerian partner(s) can be disclosed only with the communication of the contract, after the award of the contract. Paragraph 13 of Article 24 of the PPC introduces the possibility for the foreign tenderer to obtain an exemption. Should the successful tenderer not realise his investment in partnership or not respect the calendar set by the commitment of investment, the following penalties would be incurred:

• An application of penalties of delay after unsuccessful formal notice by the contracting service;

• Possibility of unilateral termination of the public procurement to the exclusive fault of the co-contracting party after agreement by the authorities;

• And/or registration of the failing operator on the list of the economic operators forbidden to tender for procurement contracts.

OBG would like to thank Gide Loyrette Nouel for their contribution to THE REPORT Algeria 2012