Minority or deadlocked shareholders in a Cypriot company may become oppressed, defrauded or unfairly prejudiced by the controlling or majority shareholders.
This article discusses the situations in which either the company or minority shareholders' interests are harmed and the available remedies in such cases.
Protection at common law
The rule in Foss v. Harbottle, an 1843 English case, essentially places the company as the proper claimant in litigation for a wrong done against it, thus leaving the matter of litigation in such cases to the majority of the board of directors of the company. Foss v. Harbottle clarified that, unless one of the below exceptions is met, courts will not interfere in the internal management of a company.
If the rule in Foss v. Harbottle was not subject to exceptions, a minority shareholder would be barred from causing the litigation over any wrongdoing done against the company. As such, the following exceptions to the rule apply, as the Supreme Court of Cyprus has confirmed in its case law, and may allow intervention by a competent court:
- Ultra vires and illegal acts – acts that are ultra vires or illegal under statute.
- Acts requiring a special majority – acts for which a special majority (e.g. a special resolution) is required but which are carried out by other means (e.g. an ordinary resolution)
- Acts violating the individual rights of a shareholder
- Acts of fraud - 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
A derivative action enables the minority shareholder to enforce a right which is vested in the company, essentially suing its directors for breach of duty. The shareholder would be suing as agent of the company on behalf of the company and damages recovered will go to the company. As such, a derivative action can essentially commence in relation to the fourth exception only, i.e. fraud on the minority.
Drawing on Supreme Court case law, shareholders who are deadlocked in a 50:50 shareholding may also be able to initiate a derivative action.
Protection under statute
Section 202 of the Companies Law, Cap. 113, provides protection to a shareholder against whom the company's affairs are conducted in an oppressive manner. The said statutory section is nearly identical to s. 210 of the long repealed English Companies Act 1948. As such, Cypriot courts rely heavily on English case law in cases of minority oppression.
The conditions that must be satisfied to successfully invoke s. 202 of Cap. 113 are summarised as follows:
- the company's affairs are carried out to the oppression of the minority shareholders
- a court would be justified to issue an order to wind-up the company on the basis that it would be just and equitable to do so; and
- the winding-up of the company would be unfair to the minority shareholders.
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.