Insights: Cyprus Company Law – Protecting Minority/Oppressed Shareholders rights

1.    Introduction

Cyprus Company Law is based on the principle of the majority rule. Consequently Cyprus courts will not generally interfere in the internal management of companies.
However, in cases where shareholders become oppressed by the controlling or majority shareholders or even the board of a Company, minority or oppressed shareholders can seek redress and protection from the courts.

2.      Shareholder Protection

2.1     Rule in Foss v. Hartbottle – General Principle

The general principal as stated in the leading English corporate law precedent of Foss v. Hartbottle (1843) 67 ER 189 is that the proper claimant in litigation for a wrong done against a company is the company itself (known as the rule in Foss v. Hartbottle).

2.2     Exceptions to the rule

There are several important exceptions which have been developed and are often described as “exceptions to the rule in Foss v Harbottle”. Amongst these is the ‘derivative action’, which allows a minority or oppressed shareholder to bring a derivative action where the wrongdoer is in control of a company and where he has taken an action that:

a)    is outside the powers of the company (ultra vires) or such actions are illegal;
b)    require a special majority;
c)    breach the personal rights of a specific shareholder;
d)    constitute a fraud on the minority on behalf of the persons controlling the company – a minority shareholder, in the absence of any other remedy, can sue when the board uses its powers willingly or not, in a fraudulent manner which benefits the board to the detriment of the company.

‘Fraud’ has been interpreted as necessitating dishonest behaviour.

‘Control’ of the company by the perpetrators,

•     through shares carrying voting rights or
•     through representing the majority shareholders or
•     through their majority or other means of control in the board itself.
which prevents a decision to file an action by the Company.

In such cases minority or oppressed shareholders are able to bring an action on behalf of the company.

2.3     Plaintiff / Claimant

A derivative action enables shareholders to enforce a right which is vested in the company, essentially suing its directors for breach of duty. The shareholders are suing as agent of the company on behalf of the company and damages recovered will go to the company.

2.4     Defendant(s)

A derivative action can be filed against any or all of the following:

a)    Shareholders;
b)    Directors;
c)    Former directors and
d)    Other persons who participated in the wrongdoings against the Company.

The company, despite the derivative action being raised to protect its own interests, is a compulsory defendant, for reasons of formality.

2.5     Causes of Action / Remedies

The following remedies can be sought in a derivative action:

a)    Cancellation of illegal or ultra vires decisions of the organs of the Company.
b)    Claims for breach of duties by directors, owed to the company (trustee & agency, duties, duty to act bona fide for the interests of the Company as a whole, duty of care, duty to avoid conflict of interests etc.).
c)    Negligence (directors, officers, auditors etc.).
d)    Breaches of Company’s constitution.
e)    Tracing and recovery of property stolen by the persons in control of the management of the Company or third parties.

2.6     “Multiple derivative action”

A member of a parent entity of a wronged subsidiary company can in certain circumstances bring a derivative action on the subsidiary company’s behalf – a so-called “multiple derivative action” – where the wrongdoer is also in control of the parent entity.

2.7     Shareholders of a foreign company

Under certain circumstances, Cyprus Courts may entertain a derivative action provided that:

a)       the law of the place of incorporation of the foreign company permits the filing of such derivative actions, or similar legal steps, on behalf of the foreign company;
b)       Cyprus Courts have in personam jurisdiction over at least one substantive defendants – (i.e. not a sham or bogus defendant who has been joined in the Cyprus action in order to establish jurisdiction of Cyprus Courts).

2.8     Remedies Under section 202 of Cyprus Companies Law, Cap. 113

Statutory protection for minority shareholders in Cyprus is also provided by Section 202 of Companies Law, Cap. 113.

Section 202 provides protection to a shareholder against whom the company’s affairs are conducted in an oppressive manner.

In such cases the Court may be petitioned to make such order as it thinks fit, whether for regulating the conduct of the company’s affairs in future, or for the purchase of the shares of any members of the company by other members of the company or by the company and, in the case of a purchase of the said shares by the company, for the respective decrease of capital of the company, or otherwise.

3.      How can we assist you?

We can assist by advising on what remedies may be available in a situation where minority shareholders have been excluded from the company, are in some other way oppressed, or where the company’s affairs are carried out in a damaging manner for the company by the majority. Contact us at [email protected] to discuss your circumstances.