Shareholders' Rights & Shareholder Activism 2023 Comparisons

The main types of limited liability companies in Cyprus are public and private companies limited by shares or by guarantee. The most common type is the private company limited by shares.

Foreign investors generally target private limited liability companies, due to the fact that the upkeep and legal requirements to set these up are less strict than for public companies, which are more tightly regulated. Private LLCs continue to be the preference for foreign investors, due to the fact that share ownership is rather stable.

The most common type of shares are ordinary shares. The rights attached to ordinary shares are determined and specified in the company's articles of association. If no specific rights are specified, it is presumed that shares rank pari passu in all respects with all other shares.

The rights attached to shares could include the right to:

• receive dividends;
• receive notice of and attend and vote at general meetings;
• receive distribution of the company's capital or assets in the occasion of the company being wound up; and
• request the company to redeem the shares concerned (in the case of redeemable shares).

The articles of association of a company might provide for different classes of shares (ie, non-voting shares, preference shares or redeemable preference shares); the relevant legislation (Cap. 113) is generally respectful of companies' rights to set up their structure as they wish.

Generally speaking, shareholders’ rights may be varied through the passing of a resolution for the amendment of the company’s articles of association. As a minimum, such resolution needs to be passed as a special resolution, which requires the approval of 75% of the votes cast at a general meeting. The articles of association of a company may provide for a higher threshold or for the approval of the variation by separate meetings of the holders of the class of shares affected by the variation of their rights.

There is no minimum share capital requirement for a private company limited by shares. For a public company limited by shares, the minimum share capital requirement is EUR25,629.

A public company is required to have at least seven shareholders, while a private limited company is required to have at least one.

It is quite common for shareholders’ agreements/joint venture agreements to be signed amongst the shareholders of private companies.

Typically, shareholders' agreements set out provisions relating to:

• the financing of the company;
• the company's business;
• the appointment of the directors;
• any reserved matters that require approval by the shareholders (with or without special majority requirements);
• the issuing and transferring of shares, exit rights and restrictions (tag-along, drag-along, pre-emption);
• the ongoing relationship of the shareholders;
• deadlock resolution; and
• competition and restrictions on the parties.

The rules of privity of contract apply to shareholders’ agreements made under Cyprus law. Therefore, a person who is not party to a contract, including a shareholders' agreement, does not have an enforceable right and cannot be subject to an enforceable obligation under the agreement. Shareholders’ agreements do not need to be filed with the appropriate local authority.       

All companies are required by law to hold their first AGM within 18 months of the setting up of the company, and to hold subsequent AGMs no longer than 15 months after the previous one. A notice of at least 21 days is required; this notice period can be reduced only via a unanimous decision of the shareholders.

Typically, the following issues are discussed/approved at an AGM:

• review/examination of the company’s financial statements, directors’ report and auditors’ report;
• election of the company’s directors (to the extent that this is required by the company’s articles of association) and determination of their remuneration;
• appointment of the company's auditors and determination of their remuneration; and
• declaration of final dividend.

Public companies are also obliged by law to hold an extraordinary general meeting (EGM) upon the occurrence of an event that leads to the loss of 50% of the company’s capital or of a percentage that creates doubt as to whether the company can achieve its corporate goal(s).

The company may also hold an EGM (ie, a shareholders’ meeting that is not the annual general meeting) for the passing of any other resolution(s) by its shareholders.

Unless a resolution proposed for approval at the EGM is a special resolution, the calling of an EGM requires a notice of at least 14 calendar days. If a special resolution is proposed for approval at the EGM, the minimum notice requirement is increased to 21 calendar days. These notice periods could be shortened following a decision taken by shareholders holding not less than 95% of the company’s shares.

Typically, a general meeting may be called following a decision of the company’s directors, or upon the request of shareholders holding no less than 10% of the shares comprising the company’s paid-up capital. If, following the deposit of such request, the directors of the company do not convene a general meeting within 21 days, the members who submitted the request may themselves convene a general meeting.

Unless the articles of association of the company provide otherwise, notice of a general meeting must be given to every shareholder, whether or not they are entitled to attend the meeting (and vote), but shareholders who have no voting rights need not be summoned to the meeting and have no right to attend it.

A notice calling a meeting must state the time and place at which it will be held. If the meeting is called to pass a special or extraordinary resolution, the notice must state so, and the proposed resolution must be set out verbatim. It would also seem necessary to set out verbatim an ordinary resolution for which special notice is required or when a resolution has been put on the agenda of an AGM on the requisition of shareholders.

Apart from these special requirements and unless the articles of association contain any additional requirements, it is sufficient that the notice calling a meeting specifies the nature of the business to be transacted in sufficient detail to enable the shareholders to decide whether they should attend the meeting to protect their interests. Additional requirements apply with respect to the content of a general meeting notice for listed companies.

Generally speaking, shareholders have the right to inspect the minutes of any general meeting of the company, the company’s register of members and the company’s register of charges.

The directors of the company are obliged to prepare financial statements with respect to each accounting year, which must be audited and presented to the shareholders together with the directors’ and auditors’ report at the company general meeting. The financial statements presented at the AGM together with the company’s annual returns must be filed with the Department of Registrar of Companies.

Moreover, the directors of a company are obliged to notify the Department of Registrar of Companies of any changes to the composition of the board of directors or to its shareholders and their respective shareholdings (only with respect to private companies). The directors must also notify the Department of Registrar of Companies of any changes to the company’s memorandum or articles of association, the company’s capital or the company’s registered address, and of any charges and/or mortgages granted by the company over its assets. All such information notified to the Department of Registrar of Companies is available to the public for inspection.

General meetings can be held remotely by electronic means or with written/electronic approval, unless the articles of association of the company expressly provide otherwise.

The quorum requirements depend on the company's articles of association. If provision for a quorum is not made in the articles of association, the following applies (Section 128(1)(c) of the Companies Law):

• for private companies with more than one member, two members must be present; and
• for any other company, three members must be present.

Different types of resolutions require different voting percentages for approval. The type of resolution required for the approval of specified actions is determined by the relevant legislation (Cap. 113) and/or the company’s articles of association. To the extent that the relevant legislation requires a particular type of resolution for the approval of an action, the articles of association of the company cannot provide for a lower threshold than the one set out in the legislation for the approval of the action in question, but it remains possible for the articles of association to require a higher threshold than the one set out in the legislation for the approval of the particular action.

As a matter of principle, shareholder approval is usually required for matters that affect shareholders' rights. Typical matters that require shareholders’ approval by law include the following:

• changing the name of the company (75%);
• amending the memorandum or articles of association of the company (75%);
• reducing the company’s capital (75%);
• placing the company under voluntary liquidation (75%);
• approving a scheme of arrangement (50%+1);
• increasing the company’s authorised share capital (50%+1);
• the consolidation or sub-division of shares (50% +1); and
• the removal of a director other than as may be provided in the company’s articles (50%+1).

For public companies, additional requirements apply with respect to resolutions resulting in the change of the amount or the classes of a company’s share capital or the rights attached to any class of shares.

The usual method of voting is by a show of hands, unless the chairman of the meeting or shareholders representing a set shareholding percentage request that voting is carried out by poll. Shareholders are normally entitled to appoint a proxy for the purposes of their representation/voting at a general meeting.

There is no restriction on the use of weighted voting rights, so the articles of association of a company may attach weighted voting rights to a particular class of shares.

Shareholders can cast votes electronically, to the extent that this is provided for in the articles of association of the company.

Apart from the right of shareholders holding not less than 10% of the shares comprising the company’s paid-up capital to request the calling of or call a meeting (see 2.3 Procedure and Criteria for Calling a General Meeting), a company is obliged, upon the requisition in writing of shareholders holding not less than 5% of the shares comprising the company’s paid-up capital, to give members of the company who are entitled to receive notice of the next AGM notice of any resolution that may properly be moved at that meeting, as well as notice of a statement of not more than 1,000 words with respect to the matter referred to in any proposed resolution or the business to be dealt with at said AGM.

For public companies whose shares are listed on the stock exchange, additional provisions/rights apply for putting items on the agenda of a general meeting.

In general, shareholders are bound by the company's articles of association, so are not entitled to challenge resolutions taken by a general meeting through the correct procedure.

However, a shareholder can challenge decisions of a general meeting where:

• their personal rights were violated (for example, if they were not allowed to exercise their right to vote);
• the resolution and the matters provided thereby are in breach of the law or the objects of the company; or
• the procedure provided for in the articles of association of the company and the law regarding the passing of the resolution at the general meeting was not followed.       

Shareholders’ groups can generally work together in exercising their voting rights, either in line with binding shareholders' agreements or on an ad hoc basis. In doing so, they could exert pressure on the company to adopt practices improving transparency and good corporate governance. Those practices could be included in the company’s articles of association or could be adopted by the company voluntarily. Moreover, shareholders’ groups could appoint/exert pressure on the company to appoint one or more persons of their liking as members of the company’s board of directors so that the activities of the company can be checked/monitored from within the company and not merely from a shareholders’ level.

Shareholders’ groups should monitor all the information the company is obliged to provide them with by law (such as audited financial statements), and should regularly carry out searches at the Department of Registrar of Companies in order to monitor any corporate changes not communicated to them by the company and/or the company’s compliance with its statutory obligations.

A company is only obliged to recognise as its shareholders the person or persons whose names appear in the company’s register of members as the holders of the company’s shares. If shares are held through nominees, the company shall only be obliged to notify/provide information to the nominee being its register shareholder and not to the nominee’s principal. Moreover, only the nominee or its proxy (but not the principal) can be validly represented and vote at a general meeting.

It is possible for the shareholders to pass a written resolution if doing so is allowed by the company’s articles of association. The written resolution will need to be signed by all the shareholders of the company.        

Pre-emption rights for existing shareholders are only obligatory by law for public companies, whereas for private companies they are only obligatory if specifically provided for in the company’s articles of association.

A private company may never acquire its own shares, while a public company may acquire its own shares under strict conditions. A private company may provide financial assistance in connection with the acquisition of its own shares by a person, provided that such financial assistance is approved by at least 90% of the shares comprising its issued share capital.

Shareholders can grant security interests over their shares. The basic types of security that can be granted over shares are pledges on share certificates, charges, assignments of rights and liens. The right to grant security over share certificates and shares may be restricted by a company's articles of association.

Unless the company's articles of association include provisions entitling the company to request its shareholders to disclose their interest, the shareholders are under no obligation to do so.

Shareholders are required to disclose the details of their ultimate beneficial owner(s) to the Department of Registrar of Companies.

Any transfer or issuance of new shares needs to be recorded in the company’s registry of shareholders, in order to be legally effective. A company’s registry of shareholders is open for inspection.

Every issuance of new shares and, with respect to private companies, every transfer of shares needs to be notified to the Department of Registrar of Companies, which maintains a publicly accessible registry containing the information of each company that has been notified to it.

In general, a shareholder does not have an obligation under the Cypriot Companies Law to notify any changes in its shareholding to a regulatory authority. Such obligation may arise if the company is a public company listed on a stock exchange and/or is an entity regulated by specific legislation (credit institution, investment company, insurance company, etc).        

A company may cancel shares forming part of its issued share capital in the following circumstances:

• if said shares were issued as redeemable shares and the conditions for their redemptions have been satisfied;
• as part of a capital reduction sanctioned by the court; and
• as part of a scheme of arrangement sanctioned by the court.

Public companies may also proceed with the cancellation of shares acquired by them following the implementation of a buyback programme in accordance with the provisions of the law.

A private company may never acquire its own shares. A public company may acquire its own shares in the context of a buyback programme, provided that certain conditions are satisfied

In general, dividends become payable when the authorised body of the company declares them as payable. It is common for the articles of association of the company to provide that dividends shall be declared at the annual general meeting of the company’s shareholders. Such dividends are called “final dividends” and relate to the profits made by the company during the financial year in relation to which financial statements are presented at the meeting. It is also common for the articles of association to provide that the directors shall have the power to declare dividends without shareholder approval. Such dividends are called “interim dividends” and relate to profits made by the company in the current financial year, up and until such interim dividends are declared.

In general, a declaration of dividend must be made out of profits.

Regarding final dividends declared by public companies, the law provides, inter alia, that the amount of a distribution to shareholders cannot exceed the amount of the result of the last financial year, increased by any profits brought forward at the end of the last financial year and sums drawn from reserves available for this purpose, reduced by the amount of losses brought forward from previous financial years and sums placed in reserve in accordance with the law and/or the articles of association.

The declaration of interim dividends by public companies may only be made if interim accounts are drawn up showing that the funds available for distribution are sufficient, and the amount to be distributed may not exceed the total profits made since the end of the last financial year for which the annual accounts have been drawn up, plus any profits brought forward and sums drawn from reserves available for this purpose, and minus losses brought forward and sums to be placed in reserve, pursuant to the requirements of the law or the articles of association.

The above provisions are generally adopted/followed by private companies as well, when declaring dividends.

The process of appointing and/or removing director(s) to/from the board of a company can be and is usually specified in the articles of association of a company.

Notwithstanding any provisions in a company’s articles of association, the shareholders may remove a director before the expiration of their period of office, by ordinary resolution (50%+1) for which special notice has been given to the company.

Shareholders have a right to judicially challenge board resolutions, where:

• the act or resolution complained of is illegal or ultra vires (outside the company's objects);
• the act required a specific majority resolution of the shareholders that was not secured; or
• a personal right of the complaining shareholders was violated by the relevant act or resolution.

Moreover, if a shareholder holds that the company's affairs (including any decisions taken by its board of directors) are being conducted in a manner that is oppressive to some part of the shareholders (including the shareholder), they can apply to the court for a remedy. Remedies can include an order regulating the conduct of the company's affairs in future.

The first auditors of a company can be appointed by the directors at any time before the first annual general meeting. They hold office until that meeting is concluded. At each annual general meeting, every company must appoint auditors to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting.

A retiring auditor, however appointed, will be reappointed at the annual general meeting without passing any resolution unless:

• they are not qualified for reappointment;
• a resolution was passed at that meeting appointing somebody else or providing expressly that they will not be re-appointed; or
• they gave the company notice in writing that they are unwilling to be reappointed.

No person can be appointed as an auditor of a company unless they hold a licence under the Auditors' Law of 2017 (Law 53 (I)/2017).

In general, the directors do not have any obligation to report to shareholders on the company’s corporate governance arrangements, unless the articles of association of the company provide for such an obligation.

Public companies listed on the Cyprus Stock Exchange (CSE) may choose to adopt/comply with the provisions of the Code of Corporate Governance issued by the CSE; if they elect not to do so, they must provide reasons for their decision.

Generally speaking, a controlling company does not have any duties or liability towards the shareholders of the company it controls. However, where the control company uses its power of control to defraud or oppress minority shareholders, the court may interfere at the insistence of the minority.

Generally speaking, shareholders are entitled to receive distribution of the company's capital or assets in a winding-up if there is a surplus following the payment of the company’s debts/liabilities in accordance with the statutory order of distribution (eg, the costs of the winding up, preferential debts and secured creditors must be settled in priority to the share capital of the company).

Generally speaking, a shareholder of a company has the following remedies.

• They may sue the company for wrongs done to them in their capacity as shareholder. By reason of their membership in the company, a shareholder is entitled to:
1. have their name and shareholding entered on the register of shareholders of the company and to prevent unauthorised additions or alterations to the entry;
2. vote at meeting of members;
3. receive dividends that have been duly declared and become due;
4. exercise pre-emption rights over other shareholders’ shares that are conferred by the articles;
5. have their capital returned in the proper order of priority in the winding up or on a duly authorised reduction of capital of the company;
6. restrain the company from executing acts that are ultra vires;
7. have a reasonable opportunity to speak at a meeting of shareholders and to move amendments to resolutions proposed at such meetings;
8. transfer their shares;
9. not have their financial obligations to the company increased without their consent;
10. exercise the various rights conferred on them under the law, such as the right to inspect various documents and registers kept by the company; and
11. have a share certificate issued to them in respect of their shares.
• They can sue the company in order to compel it to conform to its constitutional documents and the rules governing the conduct of its affairs where the shareholders cannot remedy the defect complained of.
• They can sue the company and the shareholders controlling the company if such shareholders use their power of control to defraud or oppress minority shareholders.
• They can petition the court for relief on the ground that the affairs of the company are being conducted in a manner that is oppressive to certain members, including themselves. In such a case, the court may make any order it deems fit for remedying the matters complained of if it is satisfied that the company’s affairs are being conducted oppressively and that the oppression would justify making a winding-up order on the ground that it is just and equitable, and may regulate the future conduct of the company’s affairs, order that the shares of any shareholders shall be purchased by other shareholders or by the company, or alter the company’s memorandum and articles.
• Upon the application of members holding at least 10% of the company’s issued share capital, a shareholder can request the Department of Registrar of Companies to investigate the affairs of the company.
• Subject to the satisfaction of certain conditions, they can file a derivative action for wrongs done to the company by its directors, majority shareholders or third parties.

Other than in the context of a derivative action, it will be very difficult and unlikely for a shareholder to succeed in legal proceedings against the company’s directors/officers.

In the process of winding up a company, a shareholder may apply to the court for an order that a director or officer of the company who has misapplied or retained or become liable or accountable for any money or property of the company, or who has been guilty of any misfeasance or breach of trust in relation to the company, repays or restores the money or property or any part thereof or contributes such sum to the company’s assets by way of compensation as the court shall consider appropriate.

In certain circumstances, a shareholder may bring a so-called “derivative action” in order to remedy a wrong done to the company or to compel the company to conduct its affairs in accordance with its constitutional documents or the rules of law governing it, even though no wrong has been done to said shareholder personally and even though the majority of their fellow shareholders do not wish the action to be brought.

The two basic requirements that will need to be satisfied for a derivative action to be successful are that:

• the alleged wrong or breach of duty is one that is incapable of being ratified by a simple majority of shareholders of the company; and
• the alleged wrongdoers are in control of the company, so that the company – which is the “proper claimant” – cannot claim itself.

Shareholder activism has become more noticeable over recent years, especially after the global economic crisis and its effects in Cyprus, but it is not particularly widespread in Cyprus, due to the very small number of Cypriot listed companies that have institutional and/or sophisticated investors.

The legal and regulatory tools used to facilitate shareholder activism could include:

• posing a question at a general meeting (Section 128C of the Companies Law);
• putting items on the agenda of the general meeting and tabling draft resolutions (Section 127B of the Companies Law);
• requisitioning an extraordinary general meeting (Section 126 of the Companies Law);
• voting against resolutions (Section 135 of the Companies Law);
• requiring the circulation or publication by the company of a statement (Section 134 of the Companies Law);
• removing a director (Section 178 of the Companies Law);
• filing a court petition by minority shareholders (Section 202 of the Companies Law); or
• pursuing a derivative claim.

Additional regulatory/legislative provisions relevant to shareholder activism include:

• the right of shareholders to receive information about statutory books and records (Sections 84, 99, 100(1), 108, 187(5) and 192(6) of the Companies Law);
• the right of shareholders to receive information on audited financial statements (Section 152 of the Companies Law); and
• the obligation of listed companies to provide for and secure the fair treatment of their shareholders (Section 130 of the Securities and Cyprus Stock Exchange Law (L. 14(I)/1993) – the “CSE Law”).

Case Studies

In a much-publicised case in recent years, minority shareholders (holding just over 10% of a publicly listed company) contested the sale of a hotel by the company. They took various actions to achieve their objectives, including:

• negotiating with the board of directors;
• submitting resolution proposals to the general meeting for the cancellation of the sale of the hotel;
• submitting a complaint to the Cyprus Securities and Exchange Commission (CySEC) on the basis of a breach of Section 130 of the CSE Law;
• filing a court application for the winding-up of the company; and
• filing a civil claim and seeking injunctions, damages and other remedies against the company.

Financial Reasons

The principal financial goals of an activist shareholder may include:

• seeking to have the company return capital to its shareholders;
• requiring the company to enter into a specific transaction (which may be beneficial to the company) or to generate income to ultimately increase the share price so that they can make a profit from selling the shares;
• setting the terms of a particular transaction; or
• blocking the company from entering into a particular transaction or carrying out business in a particular sector or territory.

Non-financial Reasons

The principal non-financial goals of an activist shareholder include the influencing of the board of directors with the ultimate goal to change:

• the company's strategy; or
• the composition of the board, installing directors who are more competent, ethical or environmentally friendly, or who have a different strategy aimed at improving corporate governance.

Shareholder activism is not particularly widespread in Cyprus. The activism strategy would depend on the particular goals of the shareholder(s) concerned and the shareholdings in the company held by its remaining shareholders.

Key strategies that may be used by activist shareholders include:

• requesting a copy of the company's share register to contact other shareholders and ensure that they are duly informed about the affairs of the company;
• privately approaching the board of directors to voice concerns and, if these concerns are not addressed in a satisfactory manner, warning the board that legal and public action will be taken;
• taking or threatening to take derivative action for breach of directors' fiduciary duties, or a claim for unfair prejudice or oppression against minority shareholders; and
• requisitioning a general meeting to propose and consider resolutions to effect changes in the company (such as changes to the composition or conduct of the board of directors).

Companies and directors have been more susceptible to shareholder activism since the global economic crisis and its effects in Cyprus.

A current trend is that directors may consider the effect of the environmental and communal operations of the company and the need to act fairly towards its shareholders in their effort to act in good faith and promote the success of a company for the benefit of its shareholders as a whole. Shareholders (and the public) expect a higher level of transparency, accountability and liability from company directors when it comes to corporate governance, insider dealing and the suitability of each member of a company's board of directors to manage a company.

Although there is no official database, there are strong indications that hedge funds are active in Cyprus.

To date, there has been no disclosure of information on what proportion of activist demands are met.

Typical strategies that a company might consider in responding to shareholder activism include:

• evaluating and scrutinising each board member's independence and compensation, their skills and ethos, and (more importantly) whether their skills are sufficiently complementary to enable every member of the board to fulfil its responsibilities towards the company;
• conducting regular strategic reviews to identify potential areas of challenge by shareholder activists;
• assessing its operating costs and considering ways to reduce costs (costs of services and goods, reducing waste and enhancing procurement, eliminating or minimising administrative and selling costs, etc);
• aiming to maintain a good relationship with shareholders while making sure their concerns are properly addressed and resolved in an optimal manner;

• regularly evaluating its capital structure and investments – if a company is at a peak or downside, cash should be used to pay dividends and return capital to shareholders;
• evaluating its customer strategy and reviewing revenue sources (as not all revenue is good revenue), and evaluating whether the company has unprofitable customers; and
• monitoring or paying attention to any looming activist activity in Cyprus or across the global market, to assess potential areas of attack or shareholder activists' concerns.

If faced with an activist shareholder, it is vital for a company to prepare well ahead of the general meeting in the following ways:

• researching the activists to understand their background, previous actions, goals and weaknesses before engaging with them;
• being careful before disclosing any insider and sensitive information of the company to shareholder activists and understanding their concerns before doing so;

• being careful how it publicly responds to shareholder activists, to avoid any defamatory statements;
• promoting that it is taking all reasonable steps to resolve the issues brought forward by the activists; and
• communicating with its shareholders and advisers to fully appreciate the views of its shareholders and the public, and the issues raised by the shareholder activists.

Responding at a General Meeting

At a general meeting, a company can:

• set out an action plan and strategy of the board of directors, establishing how the company will respond to the questions or issues raised by the shareholder;
• identify who has been appointed by activist shareholders as proxies or corporate representatives;
• confirm that all legal requirements (such as notice, quorum, proxies and the capacity to vote) for holding the general meeting are met; and
• inform the chairman of the general meeting of its duties and responsibilities to ensure that fair representation is given to all shareholders (and activist shareholders).