There is no easy solution, to the problem, which follows from the principle of majority rule, in Company law, that of protecting the minority shareholders from violation of their rights.
A common scenario, is where a majority shareholder, treats the Company as his own, and acts accordingly, to the detriment of the other shareholders, or where there is a breakdown in the relationship of the shareholders or any of their number, which gives rise to questions about the future ownership and control of the Company.
Under Cyprus Law, the minority shareholders are afforded the following remedies:
(1) Personal Action
If the majority shareholders, violate a personal right of a minority shareholder, then he can file a personal action against the wrongdoers to rectify such a violation (i.e. violation of the articles of association of the Company or of the terms of any shareholder agreement etc.).
(2) Derivative Action
In certain circumstances, a minority shareholder, may bring a common law derivative action, on behalf of the Company, against the wrongdoers, who committed a wrong to the Company.
Wrongdoers can be shareholders and directors of the Company, as well as third parties. In order to be able to proceed with a derivative action at common law, the minority shareholder(s) must persuade the Cyprus Courts, that the Companys (that is the majority’s) decision not to pursue a remedy for the wrong done to the Company, against the wrongdoers amounts to a “fraud on the minority” i.e. the Court must conclude, that the decision of the majority, was not made in good faith, and for the benefit of the Company, as a whole).
Any fruits of a derivative action, belong to the Company, which shall be joined as a nominal defendant to the Derivative action. A Derivative action can be combined with a personal action, in the same writ of summons.
(3) Statutory remedy of petition to winding up of the Company on a just and equitable ground.
Section 211 of the Companies Laws, CAP. 113 (“the Law”), secures the right of any shareholder of a Cyprus Company, to petition the winding up or dissolution of the Company – (before the Court of the district where the Company has its registered office) – on the just and equitable ground.
The “just and equitable ground” has been interpreted by Courts, as to cover inter alia deadlock situations, lack of trust and confidence on the management, oppressive conduct of the majority over the minority, fraud on the minority etc.
In order a shareholder to be entitled to exercise such a right, he shall be a registered member or shareholder of the Company, at least six months period, before the date of filing of such a petition.
It has been held by Cypriot Courts, that such a statutory right of a shareholder, can not be restricted or limited, by any contract (i.e. shareholders agreement containing arbitration clauses or other foreign jurisdiction clauses).
The petitioner might be precluded from filing such a petition, if he comes before Court with unclean hands (i.e. if he was responsible for the deadlock, or if he committed the wrongs, or he was party to the wrongs etc.).
(4) Statutory alternative remedy to winding up in cases of oppression.
Under Section 202 of the Law, any member of the Company, who complains that the affairs of the Company are being conducted in a manner oppressive, to some part of the members (including himself), may apply to the Court for an order:
(a) To restrain the commission of any such act, or continuance of any such conduct;
(b) That proceedings be brought in the name of the Company;
(c) For the appointment of a receiver or manager, of the whole, or part of a Company’s property, or business;
(d) For the regulation of the conduct of the affairs of the Company, in the future (i.e. for the appointment of an independent director, in order to break a deadlock in the management of the Company, or the amendment of the articles of association of the Company, in order the affairs of the company to be conducted not in an oppressive manner etc.).
(e) For the purchase of the shares of any members of the Company, by other members of the Company, or by the Company itself.
The Courts have jurisdiction to issue such an alternative remedy, only if:
(a) The Court is of the opinion, that the affairs of the Company have been conducted in a manner oppressive, to inter alia the applicant/ shareholder.
(b) That to wind up the Company, would unfairly prejudice inter alia that applicant/shareholder, but otherwise the facts would justify the making of a winding up order, on the ground that, it was just and equitable that the Company should be wound up.
(5) Statutory remedy to apply for appointment of investigators or inspectors, to investigate the affairs of the Company.
An oppressed shareholder can:
(a) Either apply by a formal letter to the Council of Ministers of the Republic of Cyprus, for the appointment of Inspectors to investigate the affairs of the Company; or
(b) To petition such appointment of inspectors by the competent Court.
Provided that such an appointment is effected by either the Council of Ministers, or by the Court, any report of such Inspectors can be used or forwarded by either the Council of Ministers or the Court to the office of the Attorney General of the Republic, for the initiation of criminal proceedings against the wrongdoers, if the findings contained in the Report, support same.
(6) “QUASI PARTNERSHIPS”
Limited Liability Companies, which are, in practical terms, run, as if they were a partnership, between the persons who are shareholders of same, might be regarded by the law, as “quasi partnership”.
The significance of the status of a “quasi partnership”, is that the Courts are, general speaking, more willing to give certain additional rights to minority shareholders, in those Companies.
In particular, a minority shareholder in a “quasi partnership” who has been involved in the management of the business of the Company, can often claim protection from being ousted or excluded, from such management of the affairs of the Company (without good reasons).
(7) Interim relief or Protection
In the context of any legal action, taken by a minority shareholder, he can apply for the issue of interim relief or protection, until the final hearing of his main action.
Such interim relief covers inter alia:
(a) Freezing injunctions blocking assets of wrongdoers, or of the Company.
(b) Interim orders, blocking inter alia convention of shareholders meetings, meetings of Board of Directors, realization or implementation of resolutions taken by shareholders meetings or directors meeting etc.
(c) Appointment of an Interim Receiver or Manager, over the whole or part of the assets or business of the Company.
(d) Norwich Pharmakal Orders or discovery orders for the disclosure of information and documents by third parties which have been innocently or not involved in the wrongdoings.
(e) Anton Piller orders to protect or preserve evidence to be used at trial etc.
(f) Chambra Type Orders to block assets of wrongdoers who are held on the names of third parties.
(g) Orders for the disclosure on oath of the location and value of assets of defendants.
(h) Gagging Orders to block a third party or a defendant, not to disclose to the defendants wrongdoers, the initiation or the existence of the legal action filed until the applicant obtains all the documents or information to be disclosed to trace the stolen assets etc.
For further information on this topic please contact
Mr. Soteris Pittas( firstname.lastname@example.org ) at SOTERIS PITTAS & CO LLC,
by telephone (+357 25 028460) or by fax (+357 25 028461)
The content of this article is intended to provide a general guide to the subject matter. Specialist advise should be sought about your specific circumstances.