Cyprus: Derivative Actions In The Republic Of Cyprus

INTRODUCTION

Cyprus, has adopted the Anglo-Saxon legal system which allows most of English cases to be cited in Cypriot Courts. Under certain conditions, the cases are treated as binding, but in most instances they are used as guidelines.

Since independence, Cyprus has maintained its legal system based on the Common Law, as followed in the English speaking world.

DERIVATIVE ACTION

The English common law rule in FOSS –V- HARTBOTTLE, has been for more than 150 years, a leading English precedent in corporate law. The FOSS RULE, provides that, if a wrong is done to a Company, then the Company is usually the proper claimant, in respect of that wrong. Only in exceptional circumstances, for example where, the wrongdoers are majority shareholders or have the control and management of the company, have the minority shareholders been able to permitted by the Court to bring a derivative action, on behalf of the Company.

The two basic requirements at common law, for a derivative action, are:

  • That the alleged wrong, or breach of duty, is one which is incapable of being ratified, by a simple majority of the members of the Company.
  • That the alleged wrongdoers, are in control of the Company, so that the company which is the "proper claimant" can not claim itself.

The minority shareholder, brings the action in his own name, but on behalf and/or for the account of the Company, which is joined as a nominal defendant, together with the wrongdoers in order to be bound by the decision to be issued in the derivative action, as well as to obtain the benefits of such decision.

The existence of such rule is justified by the need, to both prevent double recovery, and to provide protection to the Company's creditors, who might be prejudiced if the Shareholder's claim, were to succeed.

EXCEPTIONS OF THE RULE OF FOSS – PERMITTED LITIGATION

The following exceptions, protect basic minority rights, which are necessary to protect, regardless on the majority vote:

(i) Ultra Vires and illegality

The directors of the Company, or a Shareholder majority, may not use their control of the Company, to ratify actions or transactions or decisions, which violates the Memorandum of the Company (i.e. Ultra Vires) or the applicable laws.

(ii) Actions requiring a special majority

If the Company's constitution, or the applicable law, require certain special voting procedures, then any violation of same, will entitle any minority shareholder to question such violation, by a Court action.

(iii) Violation of personal rights of Shareholder

This exception, covers all violations of personal rights of a Shareholder, regulated by the Constitution of the Company, or the applicable law.

(iv) Fraud on the Minority

This exception, covers all instances of misappropriation of Company's assets or opportunities by the wrongdoers, who have the control of the Company.

When Shareholder's conduct disqualify him from bringing a derivative claim?

  1. Where the shareholders is a wrongdoer or he participates in the wrongdoings, of which he complains?
  2. Where the Shareholder, is acting for an ulterior purpose? (i.e. the claim is filed to exercise pressure, in order to promote personal interests of the Plaintiff/Shareholder or it is part of a family feud, rather than for the financial benefits of the Company).

Can a Shareholder of a Parent Company bring a derivative claim on behalf of a Subsidiary?

The situation, where a Shareholder of a parent company, wishes to bring a derivative claim on behalf of a subsidiary, is sometimes referred to as "multiple derivative action".

Despite the fact, that there is no Cyprus Court decision on the issue, there is common law precedent, permitting a shareholder of a parent Company, to file a multiple derivative action.

Who can the claim be brought against?

A derivative action can be filed against the following inter alia persons:

  • Shareholders of the Company;
  • Directors of the Company;
  • Shadow directors;
  • Former directors;
  • Third parties (i.e. person who participated in the wrongdoings against the Company).

What causes of action can be pursued in a derivative claim?

The following inter alia remedies can be included in a derivative action:

  1. Cancellation of illegal or ultra vires decisions of the organs of the Company.
  2. 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.).
  3. Negligence (directors, officers, Auditors etc.).
  4. Breaches of Company's constitution and the applicable law constitution.
  5. Tracing and recovery of property stolen by the persons in control of the management of the Company or third parties.

Can a personal action be combined with a derivative action in the same writ of summons?

Yes, it can be done. A minority shareholder can combine his personal claims, with the derivative claims in the same writ of summons in order to be examined and adjudicated together.

Can a derivative action be filed before Cyprus Courts by a Shareholder of a foreign Company?

There is common law precedent, supporting the position that, common law Courts have jurisdiction to entertain a derivative claim on behalf of a company incorporated outside the jurisdiction.

Under proper circumstances, Cyprus Courts may entertain a derivative action to be filed by a shareholder of a foreign company, on its behalf to redress wrongs, which have been committed against it, by the persons in control of its management, provided inter alia that:

  1. 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.
  2. The 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).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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