According to the European Commission,1 in 2021 Cyprus demonstrated a quite satisfactory growth rate with a GDP growth of 5.5% (up from -5.5% in 2020). Growth is expected to moderate in 2022 and 2023 to 2.3% and 3.5% respectively, due to the adverse impact of the war in Ukraine on global economy. The unemployment rate in Cyprus, which once peaked at almost 18% in 2013 following the financial crisis, fell substantially to 6.1% in 2021. Inflation showed an increase in 2021, reaching an annual level of 2.3%. It is forecast to increase to 5.2% in 2022.
Cyprus's attractiveness as an international financial centre was consolidated in 2004 when it became a member of the EU (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 that 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 Takeover Bids Law is supervised and administered by the Cyprus Securities and Exchange Commission ("CySEC") being the competent statutorily designated authority having the jurisdiction either ex officio or on a complaint made to it to, inter alia, investigate any administrative violations, impose administrative sanctions and conduct investigations and inspections. It operates within the legislative framework of the Takeover Bids Law and the Cyprus Securities and Exchange Commission (Establishment and Responsibilities) Law (the "CySEC Law"). The CySEC also has a general, all-encompassing authority to exercise the additional competencies, powers and responsibilities afforded to it pursuant to the provisions of the CySEC Law, which allow it to oversee, regulate and enforce the various provisions of the Takeover Bids Law.
The Companies Law, Cap. 113, which dates back to the colonial era but has been amended to align it with EU law provides for the various methods of acquisition, mergers, schemes of arrangement and compulsory acquisitions of minority shareholdings ("squeeze out" provisions). The Companies Law was aligned with the Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies and with the Directive 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law.
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 M&A are much smaller than those of the international M&A transactions involving Cyprus entities, reflecting the fact that Cyprus is geared towards international M&A activity and restructurings. Some notable M&A transactions relevant to Cyprus for 2021, that our firm engaged in, have been the following:
- A major M&A transaction, the largest local transaction in Cyprus that year, involved the client acquiring through an SPV compartment of the Fund, 100% of the share capital of the Parklane Hotels Limited, which included the assets (land and buildings) and the operations of the five star Parklane Hotel, its associated tourist facilities, as well as an existing residential towers development comprising 20 luxury residential units, and undeveloped land that has been approved for the further development of residential units.
- FedEx acquired Netherlands-based TNT Express-NV. As part of the integration in the Netherlands, it was intended for there to be a merger between TNT Express Worldwide B.V. as a disappearing entity with FedEx Express International B.V. a surviving entity; and for TNT Holdings Luxembourg S.A.R.L. to dissolve without liquidation, because of which all its assets and liabilities, including the shares in TNT Cyprus Finance Limited, would be acquired by FedEx Express International B.V. by operation of law.
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. This law, applying from 3 January 2018, introduced significant changes to the Investment Services and Activities and Regulated Markets Law of 2007 to 2016.
These changes 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 own account or those applying high frequency algorithmic trading techniques;
- redefining of the current exemptions under MiFID I and 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; and
- new transparency requirements, which will apply to a broader range of trading venues than previously.
There are significant penalties for breach of this 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.
Moreover, new corporate forms have been created, such as the unregulated reserved alternative investment fund ("RAIF").
Another major legal change concerns the KYC and AML regulatory provisions. These include: (a) the establishment of the register of beneficial owners, in respect of corporate and other legal entities incorporated within the territory of Cyprus; and (b) the establishment of an equivalent for trusts.
Moreover, there was a new law introduced in 2021, on the encouragement of the long-term engagement of shareholders (Shareholders Rights Law, 111(I) of 2021), in order to comply with the EU Directive 2017/828 of 17 May 2017, amending Directive 2007/36/EC. The Shareholder Rights Law establishes specific requirements to encourage shareholder engagement, especially in the long term. These specific requirements apply to the identification of shareholders, transmission of information, facilitation of exercise of shareholder's rights, transparency of institutional investors, asset managers and proxy advisors, remuneration of directors and related party transactions.
Cyprus also implemented the EU Directive 2018/882 on mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements ("DAC 6").
On 24 June 2020, the EU Council adopted an amendment to DAC6, inserting Articles 27a and 27b. The effect of the amendment was to allow EU Member States an option to defer, by up to six months, the time limits for the filing and exchange of the reportable arrangements. On 27 July 2020, the Cyprus Tax Department ("CTD") issued a circular confirming that it would be adopting the optional deferral and extending the time frames within which intermediaries and relevant taxpayers will be required to disclose information under Common Reporting Standards and DAC6.
In practice this meant the following:
- The deadline for the reporting of historical cross-border arrangements that were implemented between 25 June 2018 and 30 June 2020 was extended from 31 August 2020 to 28 February 2021.
- The beginning of the 30-day period for reporting cross-border
arrangements commenced on 1 January 2021 where:
- a reportable cross-border arrangement was made available for implementation or is ready for implementation, or where the first step in its implementation was made between 1 July 2020 and 31 December 2020; or (although not explicitly stated in the CTD circular); and
- intermediaries within the meaning of the second paragraph of point 21 of Article 3 of DAC6 provide, directly or by means of other persons, aid, assistance or advice between 1 July 2020 and 31 December 2020.
- A new deadline for the first periodic report on marketable arrangements to be made by the intermediary, was 30 April 2021. The final deadline was 30 November 2021. The COVID-19 pandemic impacted the praxis of dealmaking in the M&A sector, e.g. due diligence procedures became more onerous. The drafting of contract clauses such as representation and warranties, indemnity clauses or price adjustment had to be drafted exercising greater diligence, considering also the adverse economic environment.
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. This law brought the Cyprus legislation fully in line with Regulation (EU) 596/2014.
3. Industry sector focus
The value of global merger and acquisition activity took a 29% hit in the first quarter of 2022 as market volatility fuelled by Russia's invasion of Ukraine pushed the brakes on last year's breakneck pace of dealmaking.2
4. The year ahead
Following the shock in 2020 to the global and Cyprus economy due to the COVID-19 pandemic, economic and M&A activity in Cyprus took off in late 2020 and 2021. M&A activity in the first two months of 2022 in Cyprus was strong; however, following the invasion of Russia in Ukraine on 24 February 2022 and the unprecedented sanctions imposed by, inter alia, the US and EU, the stagflation that followed globally and the turbulence in the stock markets, it is very hard to predict the year ahead in Cyprus. Given the importance of the historic economic ties between Cyprus, Ukraine and Russia, there is a concern that M&A activity (especially international M&A involving Cypriot entities) may be negatively affected by the war. Furthermore, the sanctions have also hindered M&A activity as certain transactions cannot proceed. 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.
The shift from dependence on Russian energy in Europe and certain other counties and the necessity to find alternative energy resources has put into focus the fields of hydrocarbons that were discovered in Cyprus' exclusive economic zone. This, together with the ongoing exploration efforts by international blue-chip conglomerates such as ENI, Total and ExxonMobil, the EuroAsia Interconnector (labelled as an EU "electricity highway" connecting the national electricity grids of Israel, Cyprus and Greece through a 1,208km subsea HVDC cable)3 and the possible synergies between, inter alia, Cyprus, Egypt, Greece, Israel and Lebanon, are likely to offer significant M&A opportunities.
Originally Published by GLI – Mergers & Acquisitions 2022
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.