Shareholders' Rights & Shareholder Activism 2021

Last Updated September 23, 2021

Cyprus

Law and Practice

Authors



Scordis Papapetrou & Co LLC is a leading and dynamic Cypriot law firm whose roots date from the practice established by the late Andreas Michaelides in 1922 in Famagusta and later the respective practices of Andis Scordis, Michalis Papapetrou and Adamos Adamides. Today, the firm offers, together with its affiliates and subsidiaries, and in addition to other traditional services of a law firm, a wide range of services, such as international litigation, arbitration and dispute resolution, corporate and commercial, mergers and acquisitions, estate and tax planning and trusts, company/fund formation and administration, fiduciary and trustee services, accounting and tax advisory and financial services. The group has offices in Nicosia, Limassol, Athens, Moscow and Valletta.

Public limited companies and private limited companies are the main types of companies that can be formed.

Private limited companies, the most common type of private companies, can be limited by shares or by guarantee.

There are also specialised types of companies that may be formed pursuant to specialised legislation (such as variable capital companies pursuant to the Alternative Investment Fund/Alternative Investment Fund Managers (AIF/AIFM) law and regulations).

Generally, there are no restrictions in relation to the nationality, residence or status of any person who wants to become a shareholder in a Cypriot company.

The main types of shares issued by companies are ordinary shares, preference shares and redeemable preference shares. The rights attached to all shares are determined by a company’s articles of association.

In relation to ordinary shares, if there is no specific reference to the rights attached in the articles of association, the presumption is that they rank pari passu in all respects in relation to the other ordinary shares.

Generally, the rights attaching to shares include the right to receive dividends, to attend and vote at general meetings, to receive notice and to receive distribution of the company’s capital or assets in the case of a winding-up.

Preference shares may rank ahead of other types of shares, either in terms of dividends or capital, or both. Additionally, they usually carry limited voting rights.

Redeemable preference shares can be redeemed at the option of the company or their holder, subject to the terms of issue.

The primary sources of law and regulation governing shareholders’ rights are the following:

  • statute (ie, the Cypriot Companies Law, Chapter 113 of the Laws of Cyprus (Companies Law)), which is largely based on the English Companies Act 1948 with a number of relevant amendments;
  • the Corporate Governance Code January 2019 (fifth edition);
  • the company’s articles of association;
  • contract (ie, shareholders’ agreements); and
  • common law and equitable principles.

The right to be notified of and vote at general meetings and to a share of any dividend distributed or the assets of a company in the case of a winding-up are the main shareholder rights. At the same time, whether these rights are common to all shareholders is dependent on the company’s articles of association. It is also not uncommon for shareholder agreements to be entered into (in relation to private companies) to regulate such matters, as well as to grant additional rights or impose obligations (such as drag-along, tag-along rights/obligations in the event that a shareholder wishes to divest its interest in a company).

Variation of Rights

Variations of the shareholders’ rights are usually implemented by amending the company’s articles of association. Any such amendments to the articles of association, once duly passed, are binding on all shareholders and the company itself (irrespective of whether the shareholder agrees with the amendment), and amount to public notice to third parties on how the company operates. If a company has issued different types of shares, its articles of association may determine the variation of share rights, by providing that rights attached to any class of shares can be varied, either by:

  • written consent of 75% of the holders of the issued shares of that specific class; or
  • an extraordinary resolution passed in a separate general meeting of the holders of the shares.

Shareholder rights may be varied by a shareholder’s agreement, but any such amendments may not be binding on all shareholders or the company (only on those who are party to the shareholders’ agreement). It is therefore advisable that any such variation should be reflected in the articles of association.

Regardless of the provisions of the articles of association of a company, shareholders who hold at least 10% of the paid-up capital of the company have the right to request that directors convene an extraordinary general meeting (requisition). That right cannot be waived or varied by the articles of association. Similarly, a shareholder cannot be prevented from applying to wind up a company on the so-called “just and equitable grounds” (abuse of minority rights).

Publication of Documents

The articles of association, as well as any amendments to them, are filed with the Registrar of Companies and are publicly available for inspection. There is no general requirement that shareholder agreements be similarly filed or be publicly available. It should be noted, however, that any term of the shareholder’s agreement which contravenes any statutory provision of the Law (Cyprus Companies Law cap.113) is considered invalid under Cyprus Law and therefore it is advisable that the articles of association of a company and a shareholder’s agreement should be consistent with one another.

Shareholders’ agreements and joint-venture agreements are enforceable in Cyprus. Shareholder agreements can be entered into between all shareholders, or some shareholders, as well as including the relevant company (or not) as a party, in order to regulate their respective rights and obligations.

In order to enhance the direct enforceability of shareholder agreements and any security or rights granted thereunder, it is customary to transpose key provisions of shareholder agreements into the articles of association of the relevant company, while at the same time preserving the confidentiality of the commercial provisions of those agreements.

There are usually no requirements/restrictions on the enforceability of shareholders’ agreements/joint-venture agreements, although such agreements are enforceable only against the parties to these agreements and any rights/obligations may only rise against those parties and not against any third parties, as per the rule of privity of contracts.

Subject to any specialised provisions in the articles of association granting express rights or setting thresholds or limitations, the calling of a shareholder’s meeting (requisition) or to ask for the appointment of an inspector requires a minimum 10% shareholding, and a 5% threshold for adding items to the agenda of the general meeting for listed companies.

As regards the voting thresholds required for the approval of corporate actions through the passing of resolutions, see 1.8 Shareholder Approval.

Generally, a shareholder’s agreement and/or the company’s articles of association may contain provisions requiring a particular percentage of shareholder voting in order to pass and implement specific corporate arrangements. That percentage of shareholder voting must be at least equal to or above the minimum mandatory voting percentages referred to in 1.8 Shareholder Approval, except for the removal of a director, which cannot require a higher percentage than the mandatory requirement of over 50% of the shareholders who have the right to attend and vote.

Shareholders are entitled to inspect the company’s register of members, free of charge, and to request a copy of that register at any time.

Additionally, shareholders have the right to obtain copies of the memorandum and articles of association of the company and to inspect the register of directors and officers, bonds, debentures, charges, mortgages or encumbrances, subject to the payment of a fee, which is usually relatively low.

Moreover, a company is obliged to keep minute books for all decisions made by the company at general meetings and by the directors at board meetings. Shareholders have the right to inspect the minute books at any time, free of charge, and to request copies of any such decisions.

Any changes to the name or constituent documents of the company (Memorandum of Association/Articles of Association), the capital, the composition of the board of directors or auditors of a company require shareholder approval. The approval may be provided in the context of an annual general meeting, an extraordinary general meeting or by way of a written resolution (if the articles of association allow for the latter option).

In general, the following thresholds/approval processes apply.

Ordinary Resolution

An ordinary resolution requiring a simple majority of the members attending a general meeting (over 50% having the right to attend and vote) is required for the approval of the following:

  • appointment and removal of the company’s director;
  • alteration of the company’s share capital (including increase of share capital, consolidation and division of share capital, sub-division of shares into shares of smaller amount and cancellation of shares, conversion of paid-up shares into stock);
  • appointment and removal of auditors.

Special Resolution

A special resolution requiring at least 75% of the voting (of shareholders having the right to attend and vote) is required for the approval of the following:

  • amendment of the company’s objects;
  • amendment of the company’s articles of association;
  • amendment of the company’s memorandum (subject to court approval);
  • change of the company’s name;
  • reduction of issued capital (subject to court approval);
  • winding up;
  • altering class rights.

The company’s articles of association may contain provisions requiring a greater voting threshold, or reserved matters beyond those prescribed by law that would also require shareholder approval, apart from the removal of a director which cannot require a greater voting requirement.

Shareholders’ Right to Call a Meeting

The company’s directors are obliged to convene an extraordinary general meeting, if it is requested by:

  • members of the company holding at least 10% of the paid-up capital of the company;
  • members who must represent at least 10% of the total shareholders’ voting rights, for companies with no share capital;
  • members representing at least 5% of the total shareholders’ voting rights, for listed companies in a regulated market.

The directors must convene the extraordinary meeting within 21 days from the date of deposition of the requisition by the members. If they fail to convene that meeting within a period of three months from the date of deposition, shareholders representing more than 50% of the total voting rights may convene the meeting themselves.

Furthermore, the court has the discretion to convene that extraordinary meeting, either itself, or after the submission of an application by a member to the court, requesting the convening of the meeting.

Notice

For every general meeting to be convened, adequate notice must be given to its members. Indicatively, the following are the minimum notice periods required for convening general meetings:

  • annual general meeting: 21 days;
  • general meeting called for the passing of a special resolution: 21 days;
  • extraordinary general meeting: 14 days;
  • resolutions requiring special notice (appointment of new auditor/removal of director): 28 days.

Where the company’s articles of association provide for shorter notice periods than the aforementioned, these provisions are not valid.

The above minimum notice periods can be waived in the following manner:

  • a shorter notice period may be agreed for an annual general meeting, by all the members entitled to attend and vote at the meeting;
  • for any other meeting, a shorter period may be agreed by at least 95% of the members entitled to attend and vote at that meeting.

Information

Notices of meetings are given in accordance with the company’s articles of association and they usually require the notice to specify the date, place and hour of the general meeting.

For companies listed in a regulated market, a notice must indicate the following:

  • when and where the general meeting shall take place, as well as the proposed agenda of the general meeting;
  • any precise and specific procedures that need to be followed for a member to be able to attend and vote in the meeting, such as the shareholders’ right to add new topics in the agenda, to propose draft resolutions, to submit any questions which relate to the agenda, any right to appoint a proxy and where applicable, the procedure of electronic voting;
  • the record date, stating that only shareholders on the record date have the right to attend and vote in the general meeting;
  • where and how the complete documents and draft resolutions can be obtained;
  • the address of an internet website, whereby members can find the relevant information regarding the convening of meetings.

Virtual Meetings

Unless expressly prohibited or restricted by the company’s articles of association, a general meeting can be held by electronic means.

Voting Requirements

Ordinary resolutions at general meetings require the approval of more than 50% of the members who have the right to attend and vote in order to be passed, whereas special resolutions require the approval of at least 75% of the members who have the right to attend and vote in order to be passed.

Unless stated otherwise by the company’s articles of association, any resolution to be considered in a general meeting shall be decided on a show of hands, unless a poll is demanded. A vote on a show of hands means that every shareholder present has one vote, whereas on a poll every shareholder is entitled to a vote for each share he or she holds.

A shareholder has the right to appoint another person as his or her proxy in order to attend and vote in a general meeting. Proxies must be appointed before the time of holding the general meeting. The company’s articles may restrict the time of appointment of proxies, but any such restriction may not be more than 48 hours before the general meeting.

Quorum

The quorum requirements depend on the articles of association of the company. Therefore, unless stated otherwise in the articles, the following apply:

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

Electronic Vote

Members of listed companies may participate and vote in a general meeting by electronic means. As regards private companies, unless prohibited by the articles of association, general meetings may be held by telephone communication or with any other form of electronic means.

Raising Specific Issues

Generally, a notice of a general meeting must specify the place, the date, the time and the proposed agenda of the general meeting in order to give the opportunity to a shareholder to decide whether or not it will be in his or her interests to participate and vote in the specific general meeting. Therefore, it is not possible for shareholders to raise matters that are not included in the agenda, unless all of the shareholders of the company (not only the ones participating in the general meeting) agree.

The day-to-day management of a company is carried out by the board of directors, subject to any restrictions/controls on the directors carrying out their functions in the articles of association.

Thus, the shareholders do not generally have direct influence over or participation in the management of a company unless a shareholder is also a member of the board of directors. Having said this, the right (depending on the percentage in the capital of a company) to alter the articles of association of the company or to appoint/remove a director (see 1.12 Shareholders’ Rights to Appoint/Remove/Challenge Directors) gives shareholders the possibility to affect or influence the way a company is managed indirectly.

Shareholders may participate in the management of a company if specific provisions contained in the company’s articles of association, and/or the construction of other shareholders’ agreements, require prior shareholder approval for certain reserved matters. In that way, shareholders have a more direct role in the management of the company.

Subject to the provisions of the company’s articles of association, a shareholder can be appointed as a director and be part of the board of directors. There are no formal qualification requirements for appointments to the position of a director pursuant to the Cypriot Companies Law (but other regulatory requirements may apply for companies that are regulated by other bodies, such as financial institutions).

The first directors of a company are appointed by the initial subscribers (first shareholders) of a company and then the procedure for the appointment of subsequent directors is governed by the relevant provisions of the company’s articles of association.

Unless this power is explicitly restricted by the articles of association of the company, shareholders can appoint a director by passing an ordinary resolution. It is also common for the company’s articles of association to provide some powers to the directors to appoint other directors if a vacancy needs to be filled or an additional director needs to be appointed.

Pursuant to Cypriot Companies Law, the shareholders may remove a director prior to the expiry of his or her period of office, notwithstanding anything in the company’s articles of association or in any agreement between the shareholders and the directors, by passing an ordinary resolution.

Special notice of at least 28 days of any resolution to appoint or remove a director must be given to the company. The company shall send a copy of that notice to the director concerned. The director in question has the right to be heard at the general meeting.

Management of the company is vested with its board of directors. Shareholders do not have an explicit right to intervene in the management of the company; however, they can challenge decisions indirectly by calling a general meeting, either to decide on a particular issue (such as to resolve to prevent the director(s) from taking a particular action) or to appoint and remove members of the company’s board of directors (see 1.11 Shareholder Participation in Company Management).

In addition, shareholders have the right to challenge judicially decisions and/or actions taken by the company’s board of directors, where:

  • the resolution or act concerned is illegal or outside the company’s objectives;
  • the act concerned required a specific majority resolution of the shareholders to be secured in advance;
  • a personal right of the shareholder has been violated by the specific act or action of the board of directors;
  • the company’s affairs are being conducted in a manner oppressive to some of the shareholders.

In specific circumstances, shareholders may initiate a derivative action for and on behalf of a company in relation to a wrong which has been done to the company by the directors (see 3.6 Derivative Actions).

The first auditors of a company may be appointed by the directors at any time before the first annual general meeting and their appointment will last until the end of the first annual general meeting.

Then, at each annual general meeting, the shareholders will appoint the auditors, by passing an ordinary resolution, who will remain in office from the conclusion of the particular meeting until the conclusion of the next annual general meeting.

An auditor who is retiring shall be re-appointed at the annual general meeting without any resolution being passed, unless:

  • the auditor concerned is not qualified to be re-appointed; or
  • another auditor has been appointed by passing a resolution; or
  • the auditor is unwilling to be reappointed and he or she has provided the company with the appropriate notice in writing.

The shareholders can remove the auditors of a company by passing an ordinary resolution, before the expiry of their period of office, notwithstanding anything in the company’s articles of association or any agreement between the company and the auditor.

For the removal of the auditors of a company, a special notice of at least 28 days shall be given prior to the relevant annual general meeting of the company.

There is a public register of shareholders for companies incorporated in Cyprus, which is kept by the Registrar of Companies. For public companies incorporated in Cyprus, whose shares are listed on the Cyprus Stock Exchange (CSE), or in relation to companies which are regulated in another EU market (and thus shareholder interests are not contained in the public register), shareholders’ disclosure obligations arise in relation to their shareholding participation. Specifically, shareholders must notify the company, the Cyprus Securities and Exchange Commission and the Cyprus Stock Exchange (if the shares are listed on the CSE) when their shareholding reaches, exceeds, or falls under 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75%.

Additionally, changes in voting rights of regulated companies may be subject to further disclosure obligations, notifications or approvals by other regulating authorities, such as banks, payment institutions and investment institutions.

Granting Security over Shares

Shareholders are generally entitled to grant security interests over their shares, such as pledges on share certificates, assignments of rights, liens and charges. It is noted that the articles of association of a company may restrict the granting or the types of security interests granted over shares.

Disposing of Shares

Shareholders may generally dispose of their shares freely, subject to any restrictions provided in the articles of association of the company or a shareholder’s agreement containing, for example, any tag-along, drag-along or pre-emption rights. A private company is defined by the law as one which, inter alia, restricts the right to transfer shares. This restriction customarily takes the form of a requirement that the transfer of shares is subject to board approval or the existence of pre-emption rights in favour of other shareholders.

Shareholders’ Rights in the Event of Liquidation

In the event of a company’s liquidation, a liquidator is appointed in order to distribute the company’s assets in the following statutory order of distribution:

  • costs of the winding-up;
  • preferential debts;
  • floating charges;
  • unsecured creditors;
  • any surplus share capital of the company.

In effect, shareholders are entitled to receive the distribution of the company’s capital or assets, depending on the rights attached in their shares. This being said, distribution to shareholders shall take place provided that the company retains a surplus following payment of the distribution of assets in the above-mentioned order.

Voluntary Liquidation

Under the Cypriot Companies Law, shareholders may initiate a voluntary winding-up of the company. Specifically, the shareholders may, by an ordinary resolution, require that the company be wound up voluntarily if:

  • the period prescribed for the duration of the company by its articles of association expires; or
  • an event occurs, on the occurrence of which the articles provide that the company is to be wound up.

Alternatively, the shareholders may pass a special resolution requiring the company to be wound up voluntarily.

Lastly, the company may be wound up by an extraordinary resolution, to the effect that it cannot by reason of its liabilities continue its business and that it is advisable to wind it up.

The Effects of the COVID-19 Pandemic on Insolvency Proceedings

The emergence of the COVID-19 pandemic has caused severe financial distress and disruption in the operations of companies on a global scale. In response to this unprecedented situation, the Cypriot government introduced the Department of Insolvency and Related Matters Law 68(I)/2020 (Law 68(I)/2020) with the aim of resolving the financial difficulties which arose or are expected to arise and which may lead to insolvencies or a need for credit facility restructurings. The enactment of Law 68(I)/2020 led to the establishment of the Department of Insolvency, which is primarily responsible for:

  • the effective implementation of insolvency proceedings for individuals and legal entities (including the execution of liquidation orders) in order to contribute to the enhancement and development of the economy and the financial stability;
  • applying the relevant legislation and regulations in connection with the insolvency framework;
  • the continuous modernisation and updating of legislation and regulations in connection with the insolvency and restructuring matters; and
  • the preparation and submission of proposals and reforms in order to secure the effective operation of the insolvency framework and other restructuring matters.

Furthermore, Cyprus, as a member of the Pan-European Guarantee Fund (established to deal with the severe economic implications caused across Europe), is expected to receive significant financial assistance, whereby that financing will be used to assist SMEs and mid-cap companies.

In addition, the Cypriot government established the Cyprus Entrepreneurship Fund (CYPEF), managing to pull together an amount of EUR100 million of initial capital, which will be matched by equal contributions by the European Investment Fund, in order to enhance access to finance SMEs.

Further to the foregoing, the Cypriot House of Representatives has recently voted for the suspension of compulsory sales of main residences of a value of up to EUR350,000 and of small commercial premises employing fewer than ten employees with an annual turnover of up to EUR750,000, until 31 October 2021, but this legislation has not come into force again.

Shareholder activism (in the sense used in the US to describe the active intervention of shareholders (usually those in the minority)) in the management and overall affairs of a company is not common in Cyprus.

The Cypriot Companies Law and the Corporate Governance Code (for companies listed on the CSE) are the main statutory provisions that allow (or restrict) shareholder activism. Relevant provisions are also found in other legislative acts, such as the Market Abuse Regulation (MAR) and the Market Abuse Law (MAL), as well as regulatory acts governing and regulating listed companies, such as the Transparency Requirements Law and the Take-Over Bids Law. 

The Cypriot Companies Law offers the traditional means for manifesting shareholders’ intervention. These means range from requisitioning general meetings to requesting information about statutory books, records and financial statements, and from appointing/removing directors to more aggressive forms of action, such as the appointment of an inspector, to derivative claims and applications to the court on the “just and equitable” principle (abuse/oppression of minority rights).

The Transparency Requirements Law, applicable to listed companies, aims to enhance the visibility of shareholding build-ups and obliges shareholders whose percentage exceeds (or even falls below) 5% or 10% of voting rights to disclose their stake to the company. While this protects shareholders in some respects, it potentially creates an impediment for activist shareholders who are looking to acquire a sizeable stake before exercising pressure on the board.

Lastly, indirect restrictions to shareholder activism are also found in the Take-Over Bids Law, which obliges a shareholder, or shareholders acting in concert, holding a stake of 30% (or more) of voting rights, to make a bid “to all the holders of those securities for all their holdings” at an equitable price.

Even though shareholder activism has seen a major rise in Europe over recent years, Cyprus has not become a venue of significant activity, primarily due to the small size of its economy. Nonetheless, shareholder activism in Cyprus noticeably increased following the financial turmoil caused by the 2013 bank crisis, which heavily impacted the trust that boards of financial institutions and public companies enjoyed. Thus, major financial institutions as well as various listed companies faced challenges as regards shareholder activism, both in the context of general meetings and in court proceedings.

Shareholder activism has also been negatively affected by the COVID-19 pandemic, both due to the inability to hold meetings in person and the fact that, in the majority, investors and shareholders have been preoccupied with the impact of the COVID-19 crisis on their affairs as well as on the companies they invested in.

Usually, activism starts with demands for transparency and explanations and questions at general meetings, followed by adding items to the agenda of a general meeting (if the activist shareholder has or can build up a stake of 5% or more in a listed company) and then to the formation of alliances with other similarly minded shareholders.

Activists may also seek to engage in private discussions with members of the board to promote their concerns and suggestions.

If there is sufficient momentum and support, activist shareholders may requisition general meetings with specific agendas or even attempt to shake up board compositions. 

Lastly, if activism alone is not sufficient (either due to a lack of sufficient votes or for other reasons), an activist shareholder may apply for the appointment of an inspector, to submit a derivative action in court or apply to the court on the “just and equitable” principle (abuse/oppression of minority rights).

COVID-19 has indeed impacted activist strategies. Gaining support for waging war is not as easy when a corporation is struggling to attract capital or face extinction.

It is difficult to make generalisations in view of the small market/limited number of relevant companies in Cyprus, but it appears that the financial sector (in part due to the size and shareholder diversity of relevant companies) appears to be the subject-matter of more public activism. In addition, Cyprus’ banking sector has attracted international funds, including funds known for shareholder activism (such as Worldview Capital Management LLC, which came close to becoming a key shareholder of Hellenic Bank).

Cyprus’ banks were not the only targets of shareholder activism. One highly publicised shareholder-dispute case involved the sale of a hotel in Cyprus. The dispute made headlines due to the fierce opposition of an activist minority strongly contesting the sale, by employing a mixture of various corporate tools and publicity along with judicial action and regulatory intervention, leading to the investigation of the asset’s valuation method on behalf of the Cyprus Securities and Exchange Commission. 

COVID-19 has created challenges for all sectors of Cyprus’ economy, especially the tourist sector. The original optimistic forecasts for the 2021 season have not materialised, and the sector is likely to suffer further and create additional shareholder tension, albeit shareholders are also likely to be pre-occupied with the survival of the business as opposed to shareholder activism. 

Considering that activist hedge funds and other activist investment vehicles are essentially absent from Cyprus, no particular group/type of shareholder can be identified as being more active than others.

There is no information available on the proportion of activist demands met in Cyprus in the last year.

The first thing that a company needs to do is to ensure that it receives professional advice in order to comply with both the letter of the law and the spirit of the law. Secondly, a company should strive to take decisions and actions that are for the benefit of all shareholders, in a transparent manner. In addition, company boards could create policies for addressing shareholder concerns effectively (especially in key matters such as corporate governance and dividend policy) and remaining vigilant on shareholder relations as well as shareholder build-ups.   

Once challenged by activist shareholders, a company should not ignore them, but should address the concerns of its shareholders, especially those concerns which could prove beneficial for all shareholders and/or the company’s operations. If challenges move to the field of general meetings, the company must scrupulously adhere to the relevant rules and procedures in order to limit potential sources of dispute. Lastly, if matters become litigious, a company must always remain open to mutually beneficial settlements, aiming at the same time to use those settlements as means to mitigate the risk of future activist campaigns.

Cyprus has adopted the fundamental common-law principle that a company has an independent legal personality distinct from its shareholders and it is considered as a separate legal entity, subject to specific statutory and case-law exceptions.

Subsequently, any obligations of the company do not extend to its shareholders and its directors unless provided by law. The landmark English case of Salomon and Salomon [1897] A.C. 22 HL, in which the House of Lords affirmed the aforementioned principle, has been judicially endorsed by the Supreme Court of Cyprus in numerous cases, ie, Michaelides ν Gavrielides (1980) 1 CLR 244.

There are limited circumstances under which the courts are allowed to overlook the principle of separate legal personality, ie, “lift the corporate veil” and examine any potential liability of the shareholders with respect to the company’s conduct in order to determine the true nature of the company or the nature of a specific transaction in which the company was involved, in order to prevent the abuse of the company’s legal personality in instances of fraud.

Under the limited circumstances in which the corporate veil is lifted, the Cypriot courts may grant remedies against the shareholders and or controllers of the company which, under usual circumstances, would only be applicable against the company. 

The legal remedies available to shareholders against the company are the following.

Personal Action

Considering the contractual implications of a company’s articles of association, when shareholders’ rights have been infringed, shareholders are contractually entitled to sue by virtue of their “statutory contract” between themselves and the company, pursuant to Section 21 of the Cypriot Companies Law. Shareholders have additional tortious remedies available, such as the availability to seek damages in the case of fraud. These remedies are generally also available to minority shareholders.

Petition under Section 211(f) of the Cypriot Companies Law to Wind up the Company on a Just and Equitable Ground

Section 211(f) of the Cypriot Companies Law provides the right, to any shareholder of the company, to petition the winding up or dissolution of the company on a just and equitable ground. Whether it is “just and equitable” to wind up a company depends on the individual circumstances of each case.

In the leading case of Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 HL, Lord Wilberforce stated that it is wrong to categorise the cases in which the particular clause would be applicable.

The “just and equitable” ground has been interpreted by the Cypriot Courts to cover, inter alia, situations where:

  • the company’s main objective has failed;
  • there is a deadlock in the management of the company;
  • there is a justifiable loss of confidence and trust in the company’s management;
  • the company has been formed for a fraudulent purpose.

The court may be reluctant to wind up the company if it is of the opinion that some other remedy is available to the petitioner or in the event that the petitioner is unreasonably pursuing this remedy rather than another.

The aforementioned petition can be brought by minority shareholders.

Petition under Section 202 of Cypriot Companies Law (“Alternative Remedy” to Winding up on Just and Equitable Grounds)

Any member of a company may apply to the court seeking protection on a just and equitable basis, namely, that it would be just and equitable to be granted an appropriate remedy under Section 202 of Cypriot Companies Law because the affairs of the company are being conducted in a manner oppressive to some of the members, including himself or herself.

Petitions under Section 202 of Cypriot Companies Law allow minority shareholders, who are less able to influence the company’s affairs, rather than majority shareholders, to seek relief.

In the context of a Section 202 claim, the court can issue various orders with a view to bringing the matters being complained about to an end. While the primary remedy for oppression is the winding up of the company and distribution of its assets to its members, pursuant to Section 211 of the Companies Law (as previously referred to), Section 202 allows the court, inter alia, to issue an order to regulate the company’s affairs in the future, to purchase the shares of any members of the company from other members or from the company itself and, in the case of the latter, the respective reduction of the company’s capital, or otherwise.

Section 202 of Cypriot Companies Law is the English law equivalent of Section 210 of the old English Companies Act 1948 and the respective case authority under English law has a significant impact on how the judiciary in Cyprus approaches any matters under the aforementioned provision. In the leading case of Re Pelmako Development Ltd (Civil Appeal No 8966 10/09/1999), the Cypriot Courts expressly declared that Section 202 of Cypriot Companies Law corresponds to Section 210 of the English Companies Act 1948.

Furthermore, Sections 158 and 159 of Cypriot Companies Law, amongst others, enable shareholders to apply to the Council of Ministers for the appointment of an inspector to investigate the company’s affairs, in the event that the shareholders have good reasons to believe that (i) the company’s  business is being conducted with an intent to defraud its creditors or for a fraudulent or unlawful purpose or in a manner oppressive to any of its members or that it was formed for any fraudulent or unlawful purpose, or (ii) that persons concerned with its formation or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards it or towards its members, or (iii) that its members have not been given all the information with respect to its affairs which they might reasonably expect. 

This action is also available to minority shareholders, (i) in the case of a company having a share capital, on the application of either no fewer than two hundred members or of members holding not less than one tenth of the shares issued, or (ii) in the case of a company not having a share capital, on the application of not less than one fifth in number of the persons on the company's register of members.

Generally, shareholders remedies are available against the company rather than against the directors. It is well-established that directors’ duties are owed to the company itself, rather than to the shareholders, and therefore the company is the appropriate party to initiate legal proceedings against a director. An exception to this general principle is where shareholders initiate a derivative action on behalf of the company (see 3.6 Derivative Actions).

In exceptional cases, where a director and a shareholder are parties to an agreement, a breach of the terms of that agreement by the directors may give rise to direct contractual remedies for shareholders, subject to the provisions of the agreement.

As previously stated, Section 202 of Cypriot Companies Law gives the court the power, in cases where it can be shown that the affairs of the company are conducted in a manner which amounts to “oppression” of the minority shareholders, to order the majority shareholders, or some of them, to purchase the shares of the minority shareholders at a value to be determined by the court or in any such manner as the court may specify.

Apart from Section 202 of Companies Law, there are no other specific statutory remedies allowing shareholders (in their capacity as shareholders) to bring claims against other shareholders pursuant to Cyprus law. At the same time, general principles of contract, tort and equity apply and it may be that, on the facts of a particular case, claims may be brought under these principles. For example, under contract law, if the shareholders are parties to a shareholders’ agreement, breach of the provisions of that agreement may give rise to direct contractual remedies to the shareholders. The common remedy available for breach of a shareholders' agreement governed by Cyprus law is damages; however, depending on the specific circumstances of each case, the court may exercise its discretion and order equitable remedies, such as injunctions (ie, freezing injunctions).

Tort remedies may also be available in appropriate circumstances, pursuant to Cyprus law.

Auditors have a statutory duty to report to all the shareholders of a company (not individually) whether the accounts represent a true and fair view and that they have been prepared pursuant to the applicable legislation and the respective professional standards for the auditing of financial information and accounting standards (in the case of Cyprus companies, the International Financial Reporting Standards Foundation (IFRS)). In this respect, contractual and tort remedies are available to the company against the company’s auditors. Auditors may also be liable to all shareholders in tort.

Where the company refuses to initiate a claim against the auditors of the company, shareholders (including minority shareholders) may pursue a claim in the company’s name by way of a derivative action (see 3.6 Derivative Actions).

Pursuant to the general principle in the English case of Foss v Harbottle 67 ER 189, which was judicially endorsed by the Supreme Court of Cyprus, the company is considered to be the proper claimant in circumstances where a wrong is committed against the company itself. Usually, the board of directors is the body responsible to institute proceedings, although that responsibility will lie with the majority of shareholders in the event that the directors themselves are the alleged wrongdoers.

Exceptions to this strict principle came into force through the English case of Edwards v Halliwell [1950] 2 All ER 1064, which was judicially adopted by the Supreme Court of Cyprus in the case of Aimilios Thoma v Jacob Eliades [2006], in which Jenkins J stated that when the conduct was such that it amounted to “a fraud on the minority and the wrongdoers are themselves in control of the company”, the general principle is relaxed, allowing the minority shareholders to initiate an action (ie, a derivative action) on behalf of themselves and other members, provided that it can be shown that the persons who are alleged to be engaged in wrongdoing are in control of the company or that, for some other reason, the company is itself unable to institute legal proceedings in respect of the wrongdoing. In such cases, the shareholders’ right of action derives from that of the company.

In a derivative claim, the persons who are allegedly engaged in the wrongdoing will be named as defendants, along with the company itself. It is crucial to include the company as a defendant in order for the company to be able to secure the benefit of any court order which may be forthcoming. In practice, the company is considered as a “nominal defendant” in order to ensure that the company is bound by any decision of the court and in the view that the company itself cannot initiate the claim.

A derivative action for fraud of the minority is an equitable remedy available to shareholders and therefore it is at the court’s discretion whether such an action will proceed and which remedy, if any, is more appropriate to be granted, depending on the individual circumstances of each case.

For instance, in a derivative action the award of punitive damages in favour of the company, as the nominal defendant, and against the wrongdoers was considered correct (Aimilios Thoma v Jacob Eliades [2006], Theodoros Pirillis v Eleftherios Kouis (2004) 1 CLR 136). Also, pursuant to a judgment issued by the Supreme Court of Cyprus in the case of Christou v Milliou among others. Civil Appeal 255/2010, 13.6.2013, it was stated that a derivative action and a claim for the benefit of the claimant/shareholder cannot be combined.

A shareholder considering seeking a remedy in Cyprus will firstly need to consider whether the legal basis (grounds) for the remedy sought is met, then whether the evidence available suffices and finally the costs and time involved. Obviously, time may be of more or less critical importance, depending on the circumstances. If the timing of receiving the remedy is critical, a shareholder may wish to consider the possibility of obtaining an interim (ex parte) injunction to protect its position and right, pending the final outcome of the proceedings.

Also, the impact of any such litigation on the relationship of the shareholder concerned with the other shareholders, directors and counterparties/business of the company is another vital factor which needs to be considered. Prior to the initiation of any court proceedings, shareholders may wish to take into account whether they intend to remain shareholders of the company and whether the initiation of court proceedings would allow them to do so. Another important consideration is whether any other non-litigation measures could be taken to reach the desired outcome and whether such measures would be potentially be more efficient.

Finally, all relevant factors need to be taken into careful consideration, in conjunction with appropriate legal advice, in order to avoid unnecessary costs and, potentially, missed opportunities, in order to reach the requested outcome in the most efficient and effective manner.

Scordis Papapetrou & Co LLC

30, Karpenisi Street
the Business Forum
P.O. Box 20533
1660 Nicosia

+357 22 843 000

+357 22 843 444

info@scordispapapetrou.com www.scordispapapetrou.com
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Chryssafinis and Polyviou LLC is one of the oldest and most prestigious law firms in Cyprus. Established in 1903, with over a century of experience, the firm has earned an enviable position among the most distinguished litigation firms in the country, capable of handling complex and challenging litigation disputes. Based in Nicosia, Cyprus, the firm represents prestigious organisations, such as local and international banks, financial institutions, investment and insurance companies, hedge funds and petroleum companies. In order to represent clients better, the firm has established a tight network of affiliate law firms in the cities of Limassol, Larnaca and Paphos. The firm currently employs over 65 staff members, 30 of whom are highly trained and qualified lawyers with various specialisations, including banking law, insurance law, competition law, mergers and acquisitions, business law, employment law, aviation law, media law, and more.

With the total number of registered companies in the Republic of Cyprus as at 31 December 2019 amounting to 223,282 in a population of under one million, with attractive tax incentives in place and the widespread use of the English language, Cyprus remains one of the most desirable countries to register a company in the European Union. 

Shareholder Activism and COVID-19

Still, very few aspects of life have been left unmarred by the COVID-19 pandemic, with corporate practices and shareholder activism (or lack thereof) being among the most highly affected. As Europe and the world brace themselves for an anticipated third wave of the pandemic in Autumn 2021, it appears that certain changes, that had been implemented on a seemingly temporary basis in the past few months, could become semi-permanent structural features of the future corporate, commercial and business landscape. Not unlike many "forced" changes due to historical crises, the changes "imposed" as a result of the COVID-19 pandemic might not be all that bad in the long term.   

As a member of the Commonwealth of Nations, Cyprus retains a strong common-law tradition, therefore most of the provisions of the Cypriot Companies Act (Ch. 113) bear a close resemblance to the equivalent provisions in England and Wales, albeit with the inescapable idiosyncrasies that have developed post-independence in the past 60 years. Similarly to the way that shareholders' rights are exercised and protected in England and Wales, shareholders’ general meetings remain the most practical, if not always the most effective, way for shareholders to safeguard their rights, by voting on a vast array of items, including the appointment of directors. 

Shareholders’ general meetings, and how these are held and scheduled, have been profoundly affected by the pandemic. Due to the various measures introduced by the state to combat the pandemic, many shareholders’ general meetings could no longer take place in the traditional manner, in which shareholders attended a physical meeting to discuss or vote on the issues of the company. Just like other aspects of corporate practice, shareholders’ meetings have been moved onto the virtual plane and have been taking place either through video calls or tele-conferences, given that this is provided for in the companies’ constitutional documents. This was, of course, the case even in the pre-pandemic world; however, the volume of shareholders’ general meetings taking place virtually has, predictably, significantly increased due to COVID-19.

The responsibility of determining the particularities of holding these virtual meetings usually lies with the directors, provided that the company’s constitution allows for them. Alternatively, particularly in the case of annual general meetings (AGMs), usually decisions can be reached through written resolutions signed by the shareholders.       

Similarly to other jurisdictions, the above developments and the inability of shareholders to attend shareholders’ meetings physically has caused the decline of shareholder activism, as fewer shareholders are willing (or able) to attend shareholders’ meetings virtually. Paradoxically, the ease and convenience of attending virtual meetings created by the available technology combined with COVID-19 restrictions has not led to a surge of activism or shareholder participation in meetings. Rather the opposite has been the case. This phenomenon can be attributed to a few reasons, such as:

  • reluctance or hesitation, particularly for shareholders belonging to older age groups, to incorporate the available technology to the execution and pursuance of their shareholders’ rights;
  • inertia in changing the customary manner of attending shareholders’ general meetings;
  • an expectation that the inability to attend physical meetings is a temporary hurdle, one which will soon be eliminated or overcome;
  • the perception by shareholders that virtual meetings do not provide the same opportunities, in a practical sense, to ask questions and scrutinise the board’s decisions/position, coupled with;
  • the lack of a "social" element in virtual meetings compared to in-person meetings.   

Nevertheless, it is becoming increasingly clear that these changes, at first made necessary by the pandemic, might become a semi–permanent feature of the post-pandemic world. Just as the notion of, albeit partially, working from home has been established as a desirable arrangement by both employers and employees, virtual shareholders’ meetings are expected to pick up steam as their benefits in ease and convenience become apparent to both the companies’ boards and the shareholders themselves.     

Moreover, following the criticism that the judicial system has faced for the delays in delivering judgments, real attempts at reform have been initiated in recent months, propelled by the COVID-19 pandemic, with an e-justice pilot programme already having been launched and  groups of judges being established to deal specifically with the backlog of cases. Furthermore, a new set of Civil Procedure Rules will soon come into play that will create much-needed procedural clarity.

It is, therefore, expected that a significant increase in the speed of delivering judgments will be observed in the foreseeable future, which will make Cyprus a very attractive country in which to establish a company, where shareholders will be in a position to have their rights upheld by a competent and efficient judicial system. 

Shareholder Rights – Statute and Common-Law Protection

As has been stated earlier, Cyprus has retained a strong common-law tradition and the common-law principles’ persuasive force has even been reaffirmed by Acts of Parliament, in cases where it does not contradict domestic legislation. 

Companies in Cyprus, observing the principles established by the common law, usually take decisions subject to majority votes in either the board of directors or at shareholders’ meetings. These "democratic" principles can in some instances create tension between the majority and minority shareholders.

Domestic legislation provides some explicit protection to so-called "minority" shareholders. For example, certain crucial matters cannot be decided upon or be altered by a simple majority and require 75% of the votes. Thus, these matters, which normally include amendments to the company’s constitution, the change of the company’s name and the requirement for a leave of court for the company to reduce its share capital, are "entrenched" and offer minority shareholders some protection against the majority. 

Nonetheless, there are cases where the majority can abuse their position and act in an oppressive way vis-à-vis the minority. Cypriot law, as well as the common law, does provide protection in these cases, by attempting to maintain a balance between protecting the minority whilst at the same time allowing for the company to operate without external judicial intervention in an otherwise fully operational arrangement.

Common-Law Protection

The Foss v Harbottle rule states that the correct plaintiff in a dispute regarding actions of the company is the company itself and not its shareholders. However, common law has devised exceptions to this rule with the aim of enabling minority shareholders to bring forward a claim which otherwise would have been impossible to launch, due to the wrongdoers’ dominant position in the company (majority directors or shareholders). This common-law protection is available to minority shareholders in Cyprus. 

The Cypriot courts have interpreted and developed the aforementioned exceptions to the strict Foss v Harbottle rule, which enable minority shareholders to bring forward a claim, to include the following circumstances:

  • where the company acts in an illegal way or exceeds its constitutional mission (ultra vires);
  • where the company adopts measures by a simple majority on issues that require a special majority, such as those mentioned earlier;
  • where the personal rights of shareholders or groups of shareholders are violated; 
  • where the Acts of the company constitute fraud upon the minority and the ultimate wrongdoers are in effective control of the company.

Unsurprisingly, it is the last category that has created the most extensive case law, both in Cyprus and the rest of the common law jurisdictions. It is under this exception that derivative claims first came to be and it is this exception which remains the predominant procedural mechanism by which a shareholder may take steps to protect the company’s rights against an abusive majority shareholder who acts contrary to the interests of the company. 

It is important to note that a shareholder wishing to bring forward a derivative claim under this exception is essentially bringing forward a claim in the name of the company. Therefore, as it has been stressed in recent judgments by the Supreme Court of Cyprus, any awards in damages should be claimed on behalf of and for the benefit of the company and not the minority shareholders themselves. Where a claim is brought forward for an alleged breach of a shareholder's personal rights, damages can be awarded to the shareholders.

As has been stated previously, common-law judgments are considered to be guiding (but not binding) authorities in Cyprus. Based on both common-law and Cypriot precedents, instances where shareholders’ rights were protected via a derivative claim brought forward in the name of the company for acts of fraud upon the minority include, among other examples, the following: 

  • in a judgment by the Supreme Court of Cyprus, it was held that fraudulent acts are acts by wrongdoers who intend “directly or indirectly to secure from the company of which they are shareholders, monies, property, advantages or rights that are owned by the company”;
  • company directors fraudulently advanced their own personal interests vis-à-vis other shareholders when the company issued shares;
  • company directors fraudulently advanced their own personal interests vis-à-vis the company by securing a contract for themselves that should have been secured for the company.

Statutory Protection

Further to the common-law protection provided to minority shareholders, the Companies Act (Ch. 113), section 202, also provides statutory protection. The Cypriot legislation is modelled after the equivalent “alternative remedy” provisions contained in the Companies Act of 1948 of England and Wales, therefore useful case-law guidance can be found in older English case law as well.

There are three main requirements that need to be fulfilled for section 202 of the Cypriot Companies Law to be activated, which have been the subject of extensive case law both in Cyprus and in the broader common law. The three requirements are the following:

  • that the company operates in a way that is oppressive to minority shareholders;
  • that it would have been just and equitable for the court to order the winding-up of the company under the circumstances; and
  • that the winding-up of the Company would be unfair/unjust for minority shareholders.

Crucially, in contrast to the protection offered under the common-law exception to the Foss v Harbottle rule, an application to the court under section 202 of the Companies Law can provide meaningful remedies to minority shareholders. The available remedies, under section 202 include:

  • a court order regulating the way in which future company operations are to be conducted; or
  • a court order for the purchase of shares by other shareholders or the company itself.

Applications under section 202 of the Companies Law must be served on the company and the oppressing majority, as well as any other parties whose rights may be affected by the outcome of the proceedings.

Recently, the District Court of Nicosia dealt with the question of whether the court may compel a third party (neither a registered shareholder nor the company itself) to purchase the complainant minority shareholder’s shares in the company. The court, with a detailed judgment, accepted the third parties' position and held that no such remedy was available and, as a consequence, the section 202 application was set aside as regards those specific third parties (who were represented by Chryssafinis & Polyviou LLC). An appeal is pending before the Supreme Court concerning this first-instance judgment. 

Concluding Remarks

It is definitely the case that shareholder activism has been dealt a blow following the results of the global pandemic. It is, however, very likely that, either through the return to a semblance of normality following the defeat of the pandemic or through shareholders embracing the available technology, combined with the advancements in that technology, shareholder activism will stage a return.

Minority shareholders operating in Cyprus can rely on Cyprus’ common-law tradition and the country’s statutory protections, as well as on the judiciary’s independence to uphold their rights.

Chryssafinis and Polyviou LLC

37 Metochiou Street
Agios Andreas CY-1101.
Nicosia
Cyprus

+357 22 361000

+357 22 678011

+357 22 678011 www.cplaw.com.cy
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Scordis Papapetrou & Co LLC is a leading and dynamic Cypriot law firm whose roots date from the practice established by the late Andreas Michaelides in 1922 in Famagusta and later the respective practices of Andis Scordis, Michalis Papapetrou and Adamos Adamides. Today, the firm offers, together with its affiliates and subsidiaries, and in addition to other traditional services of a law firm, a wide range of services, such as international litigation, arbitration and dispute resolution, corporate and commercial, mergers and acquisitions, estate and tax planning and trusts, company/fund formation and administration, fiduciary and trustee services, accounting and tax advisory and financial services. The group has offices in Nicosia, Limassol, Athens, Moscow and Valletta.

Trends and Development

Authors



Chryssafinis and Polyviou LLC is one of the oldest and most prestigious law firms in Cyprus. Established in 1903, with over a century of experience, the firm has earned an enviable position among the most distinguished litigation firms in the country, capable of handling complex and challenging litigation disputes. Based in Nicosia, Cyprus, the firm represents prestigious organisations, such as local and international banks, financial institutions, investment and insurance companies, hedge funds and petroleum companies. In order to represent clients better, the firm has established a tight network of affiliate law firms in the cities of Limassol, Larnaca and Paphos. The firm currently employs over 65 staff members, 30 of whom are highly trained and qualified lawyers with various specialisations, including banking law, insurance law, competition law, mergers and acquisitions, business law, employment law, aviation law, media law, and more.

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