According to the European Commission, in 2017 Cyprus was one of the fastest-growing economies in the euro area with a GDP growth of 3.8% (up from 2.9% in 20161). While growth is expected to moderate in 2018 and 2019, to 3.2% and 2.8% respectively, it is still above the average growth forecast of 2.3% and 2.0% respectively for both the euro area and the EU.2
The unemployment rate in Cyprus, which peaked at almost 18% in 2013 following the financial crisis, fell substantially to 13% in 2016. The downward trend in the unemployment rate continued in 2017, as it fell below 11%. It is projected that by 2019 the unemployment rate will be around 9.3%, which is just over half the rate for 2013.
Inflation showed a slight increase in 2017, reaching an annual level of just under 1%. It is forecast to slowly increase to 2% by 2022.3 Taking into account the percentage at which inflation stands, the increase is considered a positive sign – and moving away from deflation territory, with its adverse consequences. The inflation figures are within the parameters set by the ECB, which aims at inflation rates of below, but close to, 2% over the medium term in order to maintain price stability according to the primary objective of the ECB's monetary policy.4
The recapitalisation of the systemic banks in Cyprus, upgrades by the independent credit rating agencies, and bond issues raising more than €3 billion, all contributed to the 9.1% increase in foreign direct investment ("FDI") in Cyprus in 2016 compared with the previous year (the 2017 figures for 2017 are not yet available).
Cyprus's attractiveness as an international financial centre was consolidated in 2004 when it became a member of the European Union (and subsequently became a core member when it joined the eurozone in January 2008). Cyprus is a common law jurisdiction, which makes it easy to structure and implement commercial contracts, financing and collateral contracts and similar agreements in Cyprus in a way which is familiar to financiers and their advisors. Most such agreements involving international business in Cyprus are governed by English law.
In addition, being a member of the EU, Cyprus has aligned its laws with the relevant directives and regulations of the EU regarding M&A. Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids ("the Takeover Directive"), was transposed into Cyprus law by the Public Takeover for the Acquisition of Shares in a Company and Related Matters Law, Law 41(I) of 2007 on takeover bids (as amended from time to time) ("the Takeover Bids Law"). The Takeover Bids Law is complemented by directives issued by the Cyprus Securities and Exchange Commission ("CySEC").
The Companies Law, Cap. 113, which dates back to the colonial era, but which has been amended to align it with EU law, provides for various methods of acquisition, mergers, schemes of arrangement and compulsory acquisitions of minority shareholdings ("squeeze out" provisions). The Companies Law is aligned with Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies.
According to section 201(I) of the Companies Law, Cap 113, "merger" means an operation whereby: (a) one or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to another existing company, the acquiring company, in exchange for the issue to their members of securities or shares representing the capital of that other company and, if applicable, a cash payment not exceeding 10% of the nominal value, or, in the absence of a nominal value, of the accounting par value of those securities or shares; or (b) two or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to a company that they form, the new company, in exchange for the issue to their members of securities or shares representing the capital of that new company and, if applicable, a cash payment not exceeding 10% of the nominal value, or in the absence of a nominal value, of the accounting par value of those securities or shares; or (c) a company, on being dissolved without going into liquidation, transfers all its assets and liabilities to the company holding all the securities or shares representing its capital.
In addition, the following statutory provisions are also important in regulating M&A transactions in Cyprus:
- The Cyprus Stock Exchange Law, Law 14(I) of 1993 (as amended from time to time), which sets out detailed disclosure requirements in respect of certain interests in shares.
- The Market Abuse Law, 102(I) of 2016.
- The Transparency Requirements (Securities Admitted to Trading on a Regulated Market) Law, 190(I) of 2007, on transparency requirements in relation to information concerning issuers whose securities are admitted to trading on a regulated market.
2. Significant deals and highlights
The number and value of Cyprus domestic mergers and acquisitions are much smaller than those of international M&A transactions involving Cyprus entities, reflecting the fact that Cyprus is geared towards international M&A activity and restructurings. For example, a transaction completed in 2017, in which the authors were involved, namely the US$12.9 billion acquisition of India's Essar Oil Ltd by a consortium including Trafigura, one of the largest physical commodities trading groups in the world, UCP Investment Group, an independent, private investment group and Rosneft, the leader of Russia's petroleum industry, was carried out using Cyprus corporate vehicles. The Trafigura-UCP consortium and Rosneft each acquired a 49.13% stake in Essar, via the Cyprus companies Kesani Enterprises Company Limited and Kesani Holdings Limited, with the remaining 1.74% of Essar's share capital remaining in the hands of retail shareholders. The transaction is India's largest ever FDI transaction.
Nevertheless, there is a significant level of domestic M&A activity, some of it arising from privatisations which the Cyprus government is promoting and which flow from consolidation in the various sectors of Cyprus industry (notably the hotels industry). The following are some notable M&A transactions in Cyprus for 2017:
- Acquisition in January 2017 by Eurogate Container Terminal Limassol Ltd of the operation of the Limassol port, which is Cyprus's principal port, handling 90% of imports and exports in terms of volumes of containers. The transaction involved EUROGATE International GmbH, Interorient Navigation Co. Ltd and East Med Holdings S.A.5 This deal followed the 25-year concession granted by the government of the Republic of Cyprus to DP World Limassol (which is part of the Dubai-based port and terminal operator6).
- Acquisition of part of the share capital of Athiari Commercial (Paphos) Ltd by Philelia Ltd. The transaction involved the Kings Avenue Mall, the biggest shopping mall in Paphos, with 100,000 square metres of indoor space.7
- Merger creating a joint venture under the name of VLPG PLANT LTD, which will engage in the construction and operation of the installation, storage and management of LPG on an industrial site within the Vassilikos industrial zone by the companies Hellenic Petroleum Cyprus Ltd, Petrolina Holdings (Public) Ltd, Synergas Cooperative Society and Intergaz Ltd. The Commission for the Protection of Competition originally gave its consent to the merger subject to specified conditions but, following the withdrawal of Hellenic Petroleum Cyprus Ltd, the competition authority is reviewing the proposal again.
- Acquisition of part of the share capital of Neurosoft AE by OPAP SA, via OPAP Investment Ltd for the sum of €34.2 million.8
- Acquisition of the share capital of Kalisee Ltd by Hellenic Bank Public Company Ltd and APS Recovery Cyprus Ltd for the sum of €20.6 million. In addition, Hellenic Bank Public Company Ltd sold its non-performing loan portfolio and real estate management business to APS Debt Servicing Cyprus Ltd. APS Debt Servicing Cyprus Ltd manages NPLs of approximately €2.3 billion and real estate assets with a value of approximately €150 million.9
- Takeover in 2017 of A&P (Andreou & Paraskevaides) Enterprises Public Company Limited by A&P (Andreou & Paraskevaides) Investments Ltd.10
- Galileo Global Education, a company under the umbrella of Providence Equity, a leading global asset management firm, acquired three institutions in Italy and Cyprus from Laureate Education, Inc., the world's largest global network of higher education institutions. The €225 million deal involved the European University Cyprus and affiliated Cyprus entities and higher educational institutions.11
- Acquisition in March 2017 of the Cypria Maris, Cypria Bay and Laura hotels in Paphos by Fattal Hotels in a joint transaction with a subsidiary of Issta Lines, Israel's largest tourist company. The €80 million deal was financed by Phoenix Insurance Company Limited.12
3. Key developments
On 7 July 2017, Law 87(I)/2017 was published in the Official Gazette of Cyprus, transposing the revised European Union Markets in Financial Instruments Directive (MiFID II) into Cyprus law. The new law, which applies from 3 January 2018, introduces significant changes to the Investment Services and Activities and Regulated Markets Law of 2007 to 2016.
The original Markets in Financial Instruments Directive, commonly known as MiFID, has been in force in Cyprus since November 2007, bringing Cyprus within the European legal framework regulating the provision of investment services within the European Economic Area. The principal aim of the previous legislation was to create a single market for investment services and activities and to ensure a uniformly high degree of protection for investors in financial instruments throughout the single market. The 2008 financial crisis revealed shortfalls in the regulatory regime and showed the need for increased transparency, better protection for investors, examination of unregulated areas and provision of adequate powers to supervisors.
The changes introduced by MiFID II, which are reflected in the new law, include the following:
- Extension of the scope of application of the law to include new financial instruments, such as emissions allowances and new investment products such as structured deposits.
- Widening of the categories of persons subject to authorisation and regulation requirements, such as persons dealing on their own account or those applying high-frequency algorithmic trading techniques.
- Redefinition of the current exemptions under MiFID I and the introduction of new exemptions.
- Introduction of a new concept of management body, and strengthening of corporate governance requirements.
- More rigorous conduct-of-business rules, including the introduction of an extended scope for the appropriateness test and enhanced information to clients.
- New transparency requirements, which will apply to a broader range of trading venues than previously.
There are significant penalties for breach of the new law, and businesses potentially falling within its scope should seek professional advice in order to ensure that they comply with their obligations. The Cyprus Securities and Exchange Commission, as the competent regulatory body, is expected to issue secondary and implementing legislation in line with the relevant EU authorities.
Competition law issues have to be taken account of from the outset to avoid penalties or, at worst, the transaction falling through. As noted earlier, the Commission for the Protection of Competition is the national competition authority, and the Cyprus competition and merger regime is fully aligned with EU norms. Most recently, Law 113(I)/2017, the Actions for Damages for Infringements of Competition Law of 2017, which was published in the Official Gazette on 21 July 2017, transposes Directive 2014/104/EU into Cyprus law.
The new law provides rules to ensure that any physical or legal person or public authority who has suffered damage as a result of infringement of the competition law by an undertaking or association of undertakings can effectively claim compensation against those undertakings. It establishes rules concerning the disclosure of evidence, whether this is in the possession of the parties or any third parties or included in the file of the national competition authority. There are limits on the use of evidence obtained solely through access to the file of a competition authority relating to leniency statements and settlement submissions.
The courts are given the power to impose a fine of up to €250,000, imprisonment for up to six months or both on the parties, any third parties or their legal representatives for a range of misdemeanours including:
- failure or refusal to comply with a disclosure order of the court;
- destruction of relevant evidence;
- failure or refusal to comply with the obligations imposed by an order of the court protecting confidential information; and
- infringement of the limits on the use of evidence.
In addition, the new law lays down rules on the liability of undertakings or associations of undertakings which have infringed competition law in relation to the damage suffered. It also gives an 'indirect purchaser' the right to claim compensation against an infringer of the competition law. An 'indirect purchaser' is anyone who indirectly (for example, via an intermediary) acquired products or services that were the object of an infringement of competition law, or products or services containing them or deriving from them, rather than acquiring them directly from the infringer.
The law provides that compensation for damage can be claimed irrespective of whether the claimant is a direct or indirect purchaser from an infringer. Compensation is limited to the damage caused by the infringement. In order to avoid claims for excessive compensation, defendants in an action for damages for infringement of competition law may raise a defence that they have passed on the overcharge resulting from the infringement, either wholly or in part. This means that the amount of compensation to be awarded depends on whether or to what degree an overcharge was passed on to the claimant, taking into account the commercial practice that price increases are passed on down the supply chain.
The limitation period for actions under the new law is six years. The limitation period may be suspended while the competition authority takes action for the purpose of investigation. Final decisions of the national competition authority or of the administrative court are deemed to be an irrefutable presumption in proceedings under the law, while a final decision of a foreign member state is prima facie evidence of infringement of competition law, which may be assessed on a case-by-case basis in the light of any other evidence produced by the parties.
Market Abuse Law
The Market Abuse Law of 2016, which was enacted towards the end of 2016, repealed and replaced in its entirety the Inside Information and Manipulation of the Market (Abuse of the Market) Law, Law 116(I) of 2005, on the rules for the prevention of insider dealing and market manipulation in both regulated and unregulated markets. The new law brought the Cyprus legislation fully in line with Regulation (EU) 596/2014.
4. Industry sector focus
Following the bail-in under the Resolution of Credit and Other Institutions Law (17(I)/2013) involving Cyprus Popular Bank Public Co Ltd and the transfer of certain of its assets to the Bank of Cyprus Public Company Limited, the increase of legislative and regulatory activity in Cyprus and at EU level (including the Bank Recovery and Resolution Directive 2014/59)13 has contributed to further M&A activity in the banking sector in Cyprus.14 This trend is likely to continue in 2018, with negotiations currently in progress for the sale of the Cooperative Central Bank Ltd of Cyprus.15
5. The year ahead
Given the importance of the historic economic and legal ties between Cyprus and the United Kingdom, there is a concern that M&A activity (especially international M&A involving Cypriot entities) may be negatively affected by Brexit, especially if a 'hard Brexit' takes place.16 However, in times of economic turbulence, some assets may become more attractive and companies may have to amalgamate, which may give rise to more M&A activity.
Most of the international M&A deals involving Cypriot entities are governed by English law. Regulation (EU) 1215/2012 of the European Parliament and of the Council on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) currently regulates jurisdiction and the recognition and enforcement of judgments between EU member states. It has direct effect in Cyprus and in other member states including the UK (only Denmark is outside its geographic scope). Unless Brexit is reversed or if some form of soft Brexit is agreed upon, the UK will leave the EU in the next year or so and the regulation will no longer apply in the UK, with the consequence that judgments delivered in UK courts will no longer be recognised automatically and enforceable in other EU member states under the regulation.
However, under separate laws, Cyprus has reciprocal arrangements with the UK, British dominions, protectorates and mandated territories and certain other foreign countries for recognition and enforcement of judgments. In common law, a foreign judgment is recognised when the Cyprus court concludes that a particular claim has already been adjudicated and determined once and for all by the foreign court. Therefore, Cyprus is in the advantageous position of being able to rely on the reciprocal arrangements on the one hand, and the recast Brussels Regulation on the other. Together with the excellent legal, accounting and banking services and the most competitive tax regime in the EU, combined with an attractive tax treaty network, this gives Cyprus a significant advantage over other EU members post-Brexit.
In addition, the discovery of new fields of hydrocarbons in Cyprus' exclusive economic zone, the ongoing exploration efforts by international blue-chip conglomerates such as ENI, Total and ExxonMobil, and the possible synergies between inter alia Cyprus, Israel, Egypt and/or Lebanon, are likely to offer significant M&A opportunities.
Originally published by Global Legal Insights.
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