It is common practice for Cypriot courts to refrain from interfering with the internal management of private companies, which is usually handled by the Board of Directors and/or the Shareholders in General Meetings unless required by applicable law and/or public policy reasons. However, there are instances where court interference is required to restore the good order of the company's affairs and eliminate the oppression of shareholders from the majority of the shareholders, who are essentially in control.
The Companies Law however does not include any express provisions that allow shareholders to go against other shareholders, when a wrong is allegedly done by the company in questions. It is a general principle of Company Law that in any action of this nature, the proper claimant is the company itself. This principle is commonly known as the rule in Foss v Harbottle.
Rule in Foss v Harbottle
In Foss v Harbottle (1842), the Court rejected the two shareholders' claim and held that a breach of duty by the directors of the company was a wrong, done to the company for which it alone could sue. In other words, the proper claimant in that case was the company itself and not the two individual shareholders.
The reasoning of the Court's decision lies in two general legal principles of Company Law, namely, that a company is a legal entity separate from its shareholders and as already mentioned the Courts will not interfere with the internal management of companies acting within their powers. Where an ordinary majority of members can ratify an act, the Court will normally not interfere. Therefore, if the majority can ratify an act, the minority cannot sue.
Nevertheless, in case of violation of the minority shareholders' rights, the following exceptions to the aforementioned rule may be applied:
- Ultra vires and illegal acts: This doctrine states that if a corporation enters into a contract that is beyond the scope of its corporate powers, then the contract is illegal.
- Acts for which a special majority (75%) is required: for instance, when a corporate action has been approved by an ordinary resolution (i.e. simple shareholder's majority), when a higher majority needs to approve the said corporate action according to the Memorandum & Articles of Association of the Company.
- Acts infringing a shareholder's personal rights. In this case, the denial of a personal right is a wrong, done to the shareholder in his capacity as such and not to the company.
- Acts of fraud committed against the minority shareholders by those in control of the company. A minority shareholder can sue when the board uses its powers in a fraudulent manner which benefits the board to the detriment of the company.
Options available to the minority shareholders:
- A personal action against the company can be filed due to a breach of duty by the company.
- A derivative action can be filed, provided that there has been a fraud perpetrated against the company, which is controlled by the wrongdoers. In this case the minority shareholders file a claim on behalf of the company. The damages recovered will be given to the company.
Remedies provided by the Cyprus Company Law Cap. 113, s.202
Among the remedies that can be sought are the following:
- A Court Order regulating the future conduct of the company's affairs;
- A Court Order for the purchase of the shares of any members of the company, by other members of the company; or
- A Court Order for the purchase of the shares of any members by the company itself and the respective decrease of the company's share capital.
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.