1 Deal structure
1.1 How are private and public M&A transactions typically structured in your jurisdiction?
The most typical structures through which private M&A transactions are conducted are:
- the sale of a Cyprus-based vehicle, which is often a holding company with underlying subsidiaries;
- the sale of a subsidiary of a Cypriot holding company;
- the sale of part of a business of a Cypriot entity;
- the merger or spin-off of two or more companies, either locally or across EU jurisdictions, or other court-sanctioned schemes of arrangement; and
- the establishment of joint venture companies.
Public M&A transactions are typically conducted through:
- the issue of additional shares to new investors;
- the squeeze-out of minority shareholders;
- the merger of two or more companies either locally or across EU jurisdictions, or other court-sanctioned schemes of arrangement; or
- the sale of a subsidiary or part of the business conducted through a subsidiary.
1.2 What are the key differences and potential advantages and disadvantages of the various structures?
From the legal perspective, there are no potential advantages or disadvantages, since appropriate legal documentation will be issued to support the particular method selected. A merger involving both private and public companies and the squeeze-out of minority shareholders will require an order of the court and in this respect, the process becomes longer and more complicated.
1.3 What factors commonly influence the choice of sale process/transaction structure?
A number of factors may influence the choice of structure, depending on the circumstances and requirements of each case. Notable factors to be taken into consideration include the following:
- the nature of the underlying asset which is being acquired, whether it involves real estate, an ongoing project, an enterprise employing personnel, IP rights or similar;
- whether the company to be acquired is carrying on regulated activities or trading in regulated items;
- the existence of other shareholders, whether there is a shareholders' agreement in place, whether there are different classes of shares and whether there are shareholders disagreeing with the proposed transaction;
- whether there are thresholds that will be exceeded and will trigger the need for regulatory clearance of any form (eg, competition, change of control, material shareholding acquisitions); and
- the requirements of any financing obtained or to be obtained. If there is need for the acquisition to be financed, the conditions to be imposed by the financing institution and/investors as regards the structure of the transaction will need to be taken into account. Similarly, if the company or the asset to be sold has previously received financing and/or is charged, it will be necessary to structure the transaction in such a way as to comply with the requirements of the financiers and/or chargees.
2 Initial steps
2.1 What documents are typically entered into during the initial preparatory stage of an M&A transaction?
There are no mandatory documents to be executed; but depending on the nature of the transaction, it is typical for the following documents to be entered into in preparation for an M&A:
- sounding documents;
- exclusivity agreements (if appropriate);
- letter of intent;
- confidentiality/non-disclosure agreement;
- due diligence exercises/reports (legal, financial and tax, technical and operational);
- heads of agreement; and
- memorandum of understanding
2.2 Are break fees permitted in your jurisdiction (by a buyer and/or the target)? If so, under what conditions will they generally be payable? What restrictions and other considerations should be addressed in formulating break fees?
There are no mandatory rules concerning break fees, but they are not frequently encountered (in our experience). Typically, each party will undertake to cover its own costs if the transaction does not complete/materialise.
When there are break fees, one should have regard to the provisions of the Contract Law (Cap 149), whereby penalty clauses serve as maximum damage clauses, but the court may award less if the actual damages are fewer. The pre-determination of a penalty to be paid as compensation in the case of breach of contract is not binding. If the amount included in the contract is deemed to have been a genuine pre-estimate of loss, however, then this will be factored in the calculation of the amount to be paid as compensation, upon proof of damage sustained.
2.3 What are the most commonly used methods of financing transactions in your jurisdiction (debt/equity)?
Both debt and equity are common methods for financing transactions.
2.4 Which advisers and stakeholders should be involved in the initial preparatory stage of a transaction?
Depending on the nature of the transaction and the business and/or assets involved:
- legal advisers;
- financial (including tax and financing) advisers;
- technical experts with expertise in the specific field of the business/asset being acquired;
- data protection officers; and
- HR officers.
2.5 Can the target in a private M&A transaction pay adviser costs or is this limited by rules against financial assistance or similar?
Generally, there are no rules prohibiting the target from paying transaction adviser costs, whether these are in the form of commissions or break fees, unless there are other issues arising from the relationship between the target and the adviser.
Section 52 of the Companies Law (Cap 113) provides that it is lawful for a company to pay a commission to any person in consideration of its subscribing or agreeing to subscribe for any shares in the company if:
- the payment of the commission is authorised by the articles;
- the commission does not exceed 10% of the price at which the shares are issued or the amount or rate authorised by the articles, whichever is less;
- the amount or percentage rate of the commission is disclosed either in the prospectus or in the statement in lieu of prospectus; and
- the number of shares which persons have agreed for a commission to subscribe absolutely is disclosed in the same manner as the commission amount or rate.
Financial assistance rules will apply if the adviser is the potential acquirer of the target, so that the payment of the adviser costs by the target could be interpreted as ‘financial assistance' of the target to the potential acquirer of its own shares. In any event, even in the remote possibility of such fees being interpreted as financial assistance, in the case of private companies, this can be ‘whitewashed' through the passing of appropriate shareholders' resolutions.
3 Due diligence
3.1 Are there any jurisdiction-specific points relating to the following aspects of the target that a buyer should consider when conducting due diligence on the target? (a) Commercial/corporate, (b) Financial, (c) Litigation, (d) Tax, (e) Employment, (f) Intellectual property and IT, (g) Data protection, (h) Cybersecurity and (i) Real estate.
Although it is possible to conduct an electronic search of the records of the target in order to verify the structure of the target and other matters (eg, capital structure, shareholders, board of directors, charges), the records kept by the Registrar of Companies are not always updated. This is due to various reasons, including:
- the processing time required between the filing of any returns with the Registrar of Companies and the update of the registrar's records; and
- companies' failure to file the required returns on time.
In addition, for a few months in 2021, the beneficial owners of the shares may not be apparent on the register, since it is currently possible for ‘nominee' shareholders to appear as the registered owners of the shares. This is about to change, with the practical application of the Fifth EU Anti-Money Laundering Directive in Cyprus, which is about to be implemented.
This is usually conducted through a review of the target's records, including audited financial statements, financing and security agreements. There is not much information which can be obtained from public sources as regards the financial standing of the target, apart from a certificate of ‘no insolvency proceedings having been commenced' which is issued by the Registrar of Companies. As indicated in question 3.1(a), however, the records of the registrar on the basis of which such certificate is issued may not always be updated.
It is not possible to conduct a public search in order to ascertain whether there is any pending litigation involving the target.
This is usually conducted through a review of the target's records. There is not much information which can be obtained from public sources, other than requesting receipts issued by the Tax Department that the target has paid any taxes due up to that moment in time. The review of tax assessments and the issuance of tax clearance certificates by the Tax Department may take considerable time, pending which it is advisable to ensure that sufficient warranties and indemnities are obtained as regards the target's tax exposure.
If the target employs any personnel who require an employment permit, confirmation should be sought from the target that such personnel hold valid and current employment permits. Likewise, confirmations should be sought that the target is up to date with its contributions to the Social Insurance Fund.
(f) Intellectual property and IT
There are no jurisdiction specific aspects as regards the target's Intellectual Property and IT that a buyer should consider when conducting due diligence on the target.
(g) Data protection
There are no jurisdiction specific aspects as regards data protection that a buyer should consider when conducting due diligence on the target.
There are no jurisdiction specific aspects as regards cybersecurity that a buyer should consider when conducting due diligence on the target.
(i) Real estate
There are no jurisdiction specific aspects as regards the target's real estate that a buyer should consider when conducting due diligence on the target.
3.2 What public searches are commonly conducted as part of due diligence in your jurisdiction?
Public searches into the files of the Registrar of Companies (subject to the limitations referred to in questions 3.1(a) and (b)).
In connection with what is stated in question 3.1(c), it is also possible to conduct searches in legal reports to discover whether there are any reported cases involving the target; although this is by no means an exhaustive way of discovering any ‘current litigation' involving the target.
Depending on the business of the target and its underlying assets, there can also be searches of the Land Registry (with the consent of the target), the Trademark Registry and so on.
3.3 Is pre-sale vendor legal due diligence common in your jurisdiction? If so, do the relevant forms typically give reliance and with what liability cap?
Pre-sale vendor due diligence is not as common as purchaser due diligence. If requested by the purchaser, the vendor could provide access to the vendor due diligence with appropriate qualifications and/or limitations.
4 Regulatory framework
4.1 What kinds of (sector-specific and non-sector specific) regulatory approvals must be obtained before a transaction can close in your jurisdiction?
No non-sector specific regulatory approval must be obtained before a transaction can close, unless merger control thresholds are triggered.
The sector-specific regulatory approvals will depend on the nature and type of transaction. For example, if the transaction involves the acquisition of shares in a regulated entity, such as a financial institution, the acquirer and the transaction may first need to be authorised by the responsible supervisory authority, such as the Central Bank of Cyprus.
In the context of the corporate restructuring of such regulated entity, there may be a need to obtain court approval for an increase of capital, an amendment of the articles and/or a change of name of the target.
4.2 Which bodies are responsible for supervising M&A activity in your jurisdiction? What powers do they have?
Other than the Commission for the Protection of Competition (whenever the transaction triggers the applicable thresholds) and any supervisory authorities for sector-specific transactions (as mentioned in question 4.1), there are no bodies responsible for supervising M&A activity in general.
4.3 What transfer taxes apply and who typically bears them?
Generally, there are no transfer taxes per se on share acquisitions and disposals, but specific tax advice should be sought in each case.
The sale of securities in Cypriot companies is exempt from income tax.
Gains from the disposal of shares in a company that is not listed on a recognised stock exchange may be subject to capital gains tax if the property of the target includes:
- real estate in Cyprus; or
- shares in another company which directly or indirectly owns real estate in Cyprus if at least 50% of the market value of the shares is derived from the market value of that real estate.
Capital gains will not be paid if the transactions fall within the statutory definition of a ‘merger'; whereupon it may be eligible for reorganisation relief.
Stamp duty is payable on documents listed in the Stamp Duty Law which concern property situated, or matters or things to be executed or done, in Cyprus, irrespective of the place of execution of the document. M&A agreements – such as share sale agreements, subscription agreements, joint venture agreements and instruments of transfer – will fall within this category of documents. Stamp duty is calculated with reference to the value of contracts exceeding €5.000. The maximum amount of stamp duty payable is €20,000, but penalties for late payment can apply.
Other taxes may be payable upon the sale of property, including refugee support fund charges, land transfer fees, corporate income tax on the sale of certain assets and value added tax.
5 Treatment of seller liability
5.1 What are customary representations and warranties? What are the consequences of breaching them?
There is no ‘closed list' of customary representations and warranties. These will normally include representations and warranties of a more general nature, such as:
- the due incorporation, good standing and capacity of the contracting parties to enter into the transaction and execute the transaction documents;
- freely transferable and unencumbered title to the asset being sold – for example, the shares in a company;
- any requirements for regulatory approval or clearance of the transaction.
- the target's compliance with applicable laws and regulations, including the filing of any tax or other returns, obligations towards its employees and so on;
- the absence of any event which would render the target in breach of any of its contractual obligations and/or would otherwise derogate from the value of the target pending completion of the sale; and
- the absence of any debt and/or other liability which could render the target insolvent.
Additionally, one would expect to see more ‘specific' representations and warranties relating to the subject matter of the transaction. For example, if the target is a pharmaceutical company, one would expect to see representations and warranties relating to the company's ownership of intellectual property, licences and so on.
5.2 Limitations to liabilities under transaction documents (including for representations, warranties and specific indemnities) which typically apply to M&A transactions in your jurisdiction?
There are no typical limitations to liabilities or indemnities. These can be freely negotiated by the parties involved.
5.3 What are the trends observed in respect of buyers seeking to obtain warranty and indemnity insurance in your jurisdiction?
The purchase of warranty and indemnity insurance is not common in Cyprus.
5.4 What is the usual approach taken in your jurisdiction to ensure that a seller has sufficient substance to meet any claims by a buyer?
The potential purchaser can seek to obtain the appropriate level of comfort:
- at the preliminary stage, through the financial and legal due diligence preceding the entry into the transaction agreements;
- through the structure of the transaction, to ensure that the value of the target and its assets is not diminished or alienated pending completion of the transaction;
- through the negotiation of appropriate representations, warranties and disclosures;
- through the staged payment of the consideration and/or through part of the consideration being held in escrow for a certain period of time, for the purpose of covering potential claims for breach of warranties, representations and/or for covering contractual or tax indemnities or similar; and
- through the taking of security and/or guarantees from third parties to ensure the seller's fulfilment of its obligations under the transaction documents.
5.5 Do sellers in your jurisdiction often give restrictive covenants in sale and purchase agreements? What timeframes are generally thought to be enforceable?
There is no pattern which is commonly followed in this respect and any restrictive covenants in sale and purchase agreements would be largely dependent on the nature of the transaction and the underlying business or asset being sold.
To the extent that sale and purchase agreements contain any non-compete, non-solicitation or confidentiality clauses, the validity and duration of such clauses will depend on their nature. For example, a confidentiality clause could remain in force for as long as the relevant information remains confidential. On the other hand, non-compete clauses may be more difficult to justify and may be subject to both contractual restrictions (ie, not to be deemed as agreement in restraint of trade) and competition rules.
5.6 Where there is a gap between signing and closing, is it common to have conditions to closing, such as no material adverse change (MAC) and bring-down of warranties?
Yes, when there is a gap between signing and closing, it is common to have conditions to closing. Alternatively, the parties may agree other actions which will be implemented in parallel so as to give comfort to the purchaser pending completion.
6 Deal process in a public M&A transaction
6.1 What is the typical timetable for an offer? What are the key milestones in this timetable?
- Under the Takeover Bids Law (41(1)/2007), the offeror must announce the making of a bid on the occasions and within the timeframes discussed in question 6.2.
- Prior to announcing its intention to make a bid, the offeror will consult with the Cyprus Securities and Exchange Commission (CYSEC) regarding the period which CYSEC will impose for the offeror to clarify its intentions.
- CYSEC will specify a period, which must not be longer than 60 days, on the expiration of which the offeror must announce a firm intention either to make or not make a bid under certain conditions.
- Following the announcement of the intention to make a bid, the offeror must, within three working days, initiate all measures to satisfy all relevant preconditions.
- Within 12 days of the announcement, the offeror must draw up the offer documents and submit them to CYSEC and the board of the target.
- Assuming that no further information is requested and the timeframe is not extended at CYSEC's absolute discretion, CYSEC will issue its decision within 8 working days or 12 days depending on the kind of consideration offered.
- Upon CYSEC's approval, the offeror will publish and/or communicate the offer document to the target, its employees and holders of the securities subject to the bid.
- The timeline for acceptance of the bid is set by the offeror in the offer document, but may not be less than 30 days or more than 55 days from the date on which the offer document was communicated.
6.2 Can a buyer build up a stake in the target before and/or during the transaction process? What disclosure obligations apply in this regard?
The offeror must announce immediately the making of a bid:
- where it has a firm intention to make a bid; or
- upon an acquisition of securities which gives rise to an obligation to make a bid, as described below.
Where a person on its own, or in concert with others, holds securities of a target whose shares are traded on a regulated stock exchange, giving it a percentage of 30% or more of the voting rights, it is required to make a bid "at the earliest opportunity" to all other holders for all their holdings at an equitable price. There is no indication in the Takeover Bids Law or related directives as to the exact days corresponding to the ‘earliest opportunity'. From past experience and practice, the offeror usually coordinates with CYSEC to determine the timeframe to make the mandatory bid, prior to taking actions that would trigger the mandatory bid requirement.
The offeror must immediately announce its intention to make a bid before the announcement of a firm decision if:
- the matter leaks out before an approach is made to the target or its shareholders to discuss the potential bid; or
- negotiations or discussions are about to be extended to include more than a restricted number of people and there is a chance of the matter leaking out.
6.3 Are there provisions for the squeeze-out of any remaining minority shareholders (and the ability for minority shareholders to ‘sell out')? What kind of minority shareholders rights are typical in your jurisdiction?
Under Sections 36 and 37 of the Takeover Bids Law, if an offeror makes a bid to all holders of securities of the target for the total of their holding, the offeror will be able to require all holders of the remaining securities to sell to it those securities in the following situations:
- The offeror holds securities in the target representing not less than 90% of the capital carrying voting rights and not less than 90% of the voting rights; or
- The offeror holds or has irrevocably agreed to acquire, following the acceptance of a takeover bid, securities in the target representing not less than 90% of the capital carrying voting rights and not less than 90% of the voting rights included in the takeover bid.
The offeror may exercise the squeeze-out rights within three months of the end of the timeframe allowed for acceptance of the bid.
In a squeeze-out right situation, a holder of the remaining securities of the target (a minority shareholder) can require the offeror to buy its securities at a fair price. This ‘sell-out right' must be exercised within three months of the end of the timeframe allowed for acceptance of the bid.
6.4 How does a bidder demonstrate that it has committed financing for the transaction?
The Takeover Bids Law (Section 17) requires that in every bid (including a mandatory bid) with cash consideration, the offeror must support its offer with the submission of a confirmation by one or more credit institutions or other organisations with the necessary solvency, according to CYSEC. The confirmation must state that the cash the offeror will be called to pay to the recipients at the expiration of the bid is available and will remain available to the credit institution or to the organisation until the date of its payment. CYSEC will reject the takeover bid documents unless they are accompanied by this confirmation, as well as a relevant confirmation from the board of the offeror stating that the amount the offeror will be called to pay to the recipients at the expiration of the bid has been tied to a credit institution or organisation and will remain tied until the date of its payment.
6.5 What threshold/level of acceptances is required to delist a company?
Pursuant to CYSEC Directive CSE 01/2015, regarding the delisting of securities from the Cyprus Stock Exchange, an issuer may submit an application to CYSEC for the purposes of delisting its shares from the Cyprus Stock Exchange. The decision to delist must have been approved, at the general meeting of the issuer called for such purposes, by at least 90% of the persons present and which have the right to vote. The extraordinary general meeting must have been called with least 21 days' notice and the notice calling the extraordinary general meeting must be accompanied by a memorandum which includes the details and explanations listed in paragraph 5 of the directive (eg, the reasons for sending the memorandum and a detailed analysis of the reasons for suggesting delisting).
6.6 Is ‘bumpitrage' a common feature in public takeovers in your jurisdiction?
Bumpitrage is not a common feature in public takeovers in Cyprus, given the size of the market and the dearth of public takeovers.
6.7 Is there any minimum level of consideration that a buyer must pay on a takeover bid (eg, by reference to shares acquired in the market or to a volume-weighted average over a period of time)?
The Takeover Bids Law (Section 13(1)) requires the offeror to make a mandatory bid to all holders of the target for all their holdings at an ‘equitable price', which is further defined in Section 18(1) of the same law. According to Section 18, in every bid, the consideration must be equal at least to the highest price paid or agreed to be paid for the same securities by the offeror or persons acting in concert with it during the last 12 months prior to the announcement of the bid.
In addition, pursuant to CYSEC Directive DI41-2007-03 of 2012 on the content of the offer document, the offer document must contain all information necessary to help the recipients of the bid to evaluate the bid in the best possible way, including a comparison of the running value of the consideration of the bid and the middle market quotation of the target's securities for the first business day in each of the six months immediately before the offeror's announcement to make a bid and for the last business day that precedes the announcement.
In contrast, in case of a voluntary bid, CYSEC may, at its absolute discretion, allow a lower price than that to be determined using the aforementioned process.
6.8 In public takeovers, to what extent are bidders permitted to invoke MAC conditions (whether target or market-related)?
A takeover bid binds the offeror and can be revoked or cancelled only in the following cases:
- the making of a competing bid;
- where the consideration offered consists of securities which are not admitted on a regulated market;
- the non-fulfilment of any pre-condition to which the bid is subject, mentioned in the offer document and approved by CYSEC;
- failure to receive the stated percentages of acceptance; or
- the existence of unforeseen and extraordinary circumstances, other than the economic inability of the offeror, as a result of which the bid may not materialise, provided that these circumstances are recognised by a decision of CYSEC.
6.9 Are shareholder irrevocable undertakings (to accept the takeover offer) customary in your jurisdiction?
Shareholders that have accepted the bid may accept a newer competing bid as long as they notify the offeror of the original bid in writing that they are withdrawing their acceptance and validly accepting the competing takeover bid, which they attach to the letter sent to the original offeror.
7 Hostile bids
7.1 Are hostile bids permitted in your jurisdiction in public M&A transactions? If so, how are they typically implemented?
There is no legislation prohibiting a hostile bid. Following an announcement to make a bid, the board of the target has an obligation to its shareholders and the representatives of its employees to provide them with quick and accurate information regarding the content of the bid (Sections 32 and 33 of the Takeover Bids Law).
7.2 Must hostile bids be publicised?
Yes, every takeover bid (whether hostile or not) must be publicised.
7.3 What defences are available to a target board against a hostile bid?
The target board is obliged to provide the shareholders with its views, as well as those of special experts, on:
- the effects of implementation of the bid on all of the company's interests, and specifically employment; and
- the offeror's strategic plans for the target and their likely repercussions on employment.
In case of a hostile bid, the target board will provide the shareholders with their reasons for contesting the hostile bid.
8 Trends and predictions
8.1 How would you describe the current M&A landscape and prevailing trends in your jurisdiction? What significant deals took place in the last 12 months?
Despite the effects of the COVID-19 pandemic and the small size of the jurisdiction, there has been constant M&A activity in the past 24 months. The sectors which saw most M&A transactions were the renewable energy, telecommunications, technology, real estate and health sectors. Notable examples which have been publicised include the following:
- Epic Ltd, one of the largest telecommunications networks in Cyprus, reached an agreement with Phoenix Towers International for the sale of its passive mobile infrastructure. This deal comes after the acquisition of Epic (ex MTN) by Monaco Telecom in 2018.
- In January 2019, AstroBank Public Company Limited completed the acquisition of the banking business of USB Bank PLC.
- Ayia Napa Marina is an infrastructure/tourism development project which has been ongoing for the past few years and is about to be launched.
- City of Dreams Integrated Casino Resort has been ongoing for the past few years and its opening is now planned for 2022.
- Oxley Planetvision Properties (a joint venture between the Singapore-based Oxley Group and Planetvision developers) appointed global hotel leader AccorHotels and its Sofitel brand to manage the new 245-room Sofitel Limassol Resort and Residences, expected to open in 2022.
8.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms? In particular, are you anticipating greater levels of foreign direct investment scrutiny?
We are not aware of any country-specific developments or proposed legislative reforms currently in the pipeline which are expected to directly impact on foreign direct investments.
The Foreign Direct Investment Screening Regulation (2019/452) entered into force on 11 October 2020, but Cyprus has yet to implement any screening mechanisms.
Greater scrutiny is being exercised under the applicable anti-money laundering law – the Prevention and Suppression of Money Laundering and Terrorist Financing Law (188(I)/2007) – and related regulations. The Fifth Anti-Money Laundering Directive (2018/843) has just been implemented and an ultimate beneficial ownership register is currently being set up. Client onboarding and acceptance policies are quite strict and may take a long time to be completed. This is particularly true as regards the opening of bank accounts with Cyprus banks.
The Social Enterprises Law (207(I)/2020) was passed in December 2020, but no regulations have been passed as yet (which would highlight the benefits of such organisations). In any event, it is not expected that this law will impact on foreign direct investment.
9 Tips and traps
9.1 What are your top tips for smooth closing of M&A transactions and what potential sticking points would you highlight?
- Ahead of closing, allow for as much time as possible:
- for thorough legal, financial and tax due diligence, enabling the potential buyer to get deeper insight into the operation and structure of the target and discuss concerns with the vendor;
- to plan and structure the transaction, including preparation for any regulatory or other clearances, factoring in the time required for any administrative act to be taken; and
- to negotiate and agree the terms of the transaction.
- For the completion or pending the completion of the above:
- Enter into the appropriate non-disclosure and/or exclusivity agreements; and
- Engage an experienced team of advisers to support the parties through all stages, including the negotiation and drafting of the various agreements.
- For closing:
- Ensure that the transaction documents are well drafted and encompass as many potential scenarios of events occurring as possible;
- Have an agreed, detailed step plan, pre-agreed forms to be executed at closing or post-closing, and a list of deliverables to be exchanged;
- Agree in advance on the acceptance of electronic copies, electronic signatures, number of copies and potential stamping of documents; and
- Factor in the time difference between the various jurisdictions involved in the closing.
- Monitor the implementation of the agreement; and
- Integrate not only the business operations, but also the cultures, of the two entities involved in the M&A transaction, with particular emphasis on the employees.
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.