Cyprus: Cyprus Company’s Constitutions, Shareholders Agreements And Potential Conflicts

I. INTRODUCTION

The use of a large number of Cypriot Companies as vehicles for carrying out joint ventures, led JV Partners to enter into Shareholders Agreements or JV Agreements, sometimes, without fully understanding the consequences, of their contractual arrangements, and especially and most importantly, the interplay, between the Company's memorandum and articles of association on the one hand, and a shareholders agreement on the other.

This Memo, examines this dynamic in the context of a Cypriot Company, and aims to give some light, on what parties must do, and what risks, must avoid.

II. CYPRUS COMPANY

The use of a Cypriot Company, provides substantial advantages relating to limited liability, separate legal personality, certainty, financing and tax flexibility.

Cyprus Companies Laws (CAP. 113) ("the Law"), is identical to the old English Companies Act 1948, and contains a mature body of statutory principles, supported by an established commercial court practice.

The Cypriot Company is a creature of statute, a fictious entity, without physical, tangible existence, or presence.

III. THE CONSTITUTION OF CYPRUS COMPANY

The Cypriot Company has two sets of documents which define its constitution, namely the Memorandum of Association ("the MA") and the Articles of Association ("the AA").

Both MA and AA are deposited with the Registrar of Companies and are available to the public.

The MA contains inter alia and mainly, the Company's objects and powers. The AA contains regulations, concerning the internal management of the Company, and it is therefore an essential document for the promoters, or founders of the company, which should be tailored, to accord with particular circumstances, and requirements of the venture, and to reflect the bargaining power of the founding members.

The Law is founded on the "majority rule", but secures minimum protection for minority shareholders.

IV. NATURE OF MA AND AA

Cyprus Company, comes into existence by virtue of the Law, and compliance with the requisite provisions.

Under the Law, the MA and AA constitute together a contract known as a "statutory contract" between the company, and its members / shareholders, and between its members inter se.

The Law provides for a procedure of amendment of the MA and AA. Any amendment of the MA and of the AA shall be approved by a special resolution passed by the holders of the 75% of the issued share capital, attending the Shareholder's meeting.

V. INTERPLAY BETWEEN SHAREHOLDER'S AGREEMENT AND COMPANYS MEMORANDUM & ARTICLES OF ASSOCIATION

In instances, where there is a Shareholders Agreement, executed by all registered members / shareholders of a Company and the Company, then there is a great possibility that conflicts might arise, between the terms of the Shareholders Agreement, and the terms of the Memorandum and Articles of Association of the Company.

If there is such a conflict, the terms of the Shareholders Agreement will prevail and they shall have superior effect. The legal principles laid down in inter alia the English cases RE DUOMATIC and CANE –V- JONES, are fully applicable in Cyprus.

In DUOMATIC it was held that, where it could be shown, that all shareholders with the right to attend and vote at a general meeting, had assented to a matter, which a general meeting of the Company, could carry into effect, the assent was as binding as a resolution in general meeting.

Similarly in CANE –V- JONES, where a Shareholder's Agreement had been entered into, it was held that it was a basic principle of company law, that all corporators of a Company acting together, could do anything, which was within the Company's powers.

VI. REMEDIES

If there is a breach of the Shareholders Agreement any contracting party can enforce same by an action for specific performance, and for damages, as well as to apply for an injunction to block the violation of same.

If there is a breach of the Memorandum and Articles, the thing purported to be done would probably be invalid. Any shareholder of the Company and the Company itself are entitled to apply for specific performance of the statutory contract contained in the Memorandum and Articles of Association of the Company, for damages as well as for an injunction blocking the violation of same.

VII. INCORPORATION OF TERMS OF SHA AND JV AGREEMENTS IN THE ARTICLES OF ASSOCIATION?

We strongly advise that all substantive terms of the SHA, or of the JV Agreement shall be incorporated in the Articles of Association of the JV Company by effecting all necessary amendments and registering same with the Registrar of Companies in order to inter alia:

  1. give to such terms the nature and legal effect of a statutory contract; and
  2. inform the public at large, that the applicable Articles of Association of the JV Company, contains the relevant terms in question.

By doing so the JV Company and its shareholders/partners, will avoid the risk of the adoption of any action or decision by the directors of the JV Company, which might violate the terms of the SHA, but not the Articles of Association of the JV Company, as well as to give constructive notice to all persons, about the limits and extent of the powers of the Board of Directors of the JV Company.

VIII. TERMS OF SHAREHOLDERS OR JV AGREEMENTS CAN BE VOID AND NOT ENFORCEABLE FOR VIOLATION OF STATUTORY PROVISIONS OF THE LAW.

Any term of the Shareholders or JV Agreement, which contravenes or violates any statutory provision of the Law is invalid and unenforceable under Cyprus Law.

For example under Cyprus Law, the statutory right of the shareholder of a Cyprus Company to petition the winding up of the Company before the competent Court in Cyprus, can not be limited or extinguished by any agreement or contract.

Any term of a contract imposing such limitation or restriction, is invalid and unenforceable.

Another example is a contractual provision, restricting or excluding the right of a Cyprus Company to increase its share capital or remove its directors or to implement its statutory obligations stated in the Law, or when the terms of the Shareholders or JV Agreement violate the "anti-deprivation principle" (i.e. "there cannot be a valid contract, that a man's property shall remain his until his bankruptcy, and on the happening of that event, go over to someone else, and be taken away from his creditors" To deprive the creditors in this way, would be contrary to public policy).

IX. CONCLUSION

Professional advice shall be obtained by the partners of Cyprus JV Companies, before they embark in the establishment and operation of such joint ventures in order to safeguard their interests and limit the risks of any future conflicts between them.

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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