Minority Shareholders Oppression in Cyprus companies and available remedies
Cyprus fully recognizes the possibility that minority shareholders in a Company may become oppressed or unfairly prejudiced against on behalf of the controlling or majority shareholders and/or the board of the Company. There are various situations in which either the Company or minority shareholders’ interests are harmed by the majority shareholders under Cyprus law and the available remedies in such cases.
1. Minority Shareholders’ Protection at Common Law
The Rule in Foss v. Hartbottle
The fundamental nature of the rule in Foss v. Hartbottle , an 1843 English case, and the exceptions to the rule judicially developed thereafter constitute the source of Common Law principles relating to the protection of minority shareholders in general. The rule essentially provides that “to redress a wrong done to the company, or to recover money or damages alleged to be due to the company, the action should prima facie be brought by the company itself”. The rule therefore 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 or the shareholders or both. It also emanates from the rule in Foss v. Hartbottle that the courts will not interfere in the internal management of companies.
The Exceptions to the Rule
It is evident that if the said rule was not subject to certain exceptions, a minority shareholder would be barred from litigating over any wrongdoing. As such, the following exceptions to the rule in Foss v. Hartbottle have been formulated (The Supreme Court of Cyprus has very recently upheld the existence of these exceptions) :
(a) Ultra vires and illegal acts - Acts that are ultra vires or illegal under statute.
(b) Acts requiring a special majority - Acts for which a special majority (e.g. a special resolution) is required but which is carried out by other means (e.g. an ordinary resolution). An example often faced under this exception is the amendment of a company’s Articles of Association by ordinary resolution.
(c) Acts that infringe a shareholder’s personal rights - The denial of a personal right is a wrong done to the shareholder in his capacity as such and not to the company. In this exception the company would not be the ‘proper claimant’ and the proceedings would not constitute a derivative action (see below). It has been clarified that a shareholder cannot bring an action for breach of duty by directors since the latter do not owe their duties to the shareholder but to the company.
(d) Acts of fraud against the minority on behalf of the persons controlling the company - This exception has been held to be the genuine exception to the rule in Foss v. Hartbottle. Under this notion, 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.
In relation to the concept of ‘fraud’, which must be established for satisfying the fourth exception referred, this has been interpreted widely by Courts and is confined to dishonest behavior. Within the said context and under the same exception, the element of control also becomes a fundamental component of any action against wrongdoers. In light of the controlling power of wrongdoers (either through shares carrying voting rights or through representing the majority shareholders or through their majority or other means of control in the board itself) an action on behalf of the company would be technically prevented, thus enabling the minority shareholder to sue on behalf of the company. The company is therefore placed, for reasons of formality, as a compulsory defendant, despite the derivative action being raised to protect its own interests.
A derivative action enables the shareholder to enforce a right which is vested in the company, essentially suing its directors for breach of duty. The shareholder is 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 be raised in relation to the fourth exception only, i.e. fraud on the minority. On the other hand, the third exception removes the applicability of the majority rule of Foss v. Hartbottle altogether, which leads to a clearly personal action.
2. Minority Oppression under Statute: Petition Under s. 202, Cap. 113
Section 202 of 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 and as such Cypriot Courts rely heavily on English case-law in exercising their judicial powers in cases of minority oppression under statute.
The conditions that must be satisfied towards invoking the rights provided under s. 202 can be synopsized as follows:
(a) The company’s affairs are carried out to the oppression of the minority shareholders;
(b) 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
(c) The winding-up of the company would be unfair to the minority shareholders.
Upon satisfaction of the above conditions, the Court may, with a view to' bringing to an end the matters complained of, make such order as it thinks fit, whether for regulating the conduct of the company's affairs in future, or for the purchase of the shares of any members of the company by other members of the company or by the company and, in the case of a purchase of the said shares by the company, for the respective decrease of capital of the company, or otherwise.
Although the legal topic under discussion has not been exhausted by Cypriot Courts, they have nonetheless thoroughly examined it in cases brought before them. Of particular note is the Supreme Court’s Judgment in In re Pelmako Developments Limited, which is most illustrative of the matters discussed in the present Memorandum.
In its Judgment in In re Pelmako Developments Limited, the Court upheld the English judgment in Re Five Minute Car Wash Service Ltd, interpreting the notion of ‘oppression’. It made particular reference to the elements that a claim for minority oppression must contain. Specifically, such claim must:
(a) Concern the rights of the company’s members;
(b) Be related to the conduct of the company’s affairs;
(c) Make the company’s dissolution just and equitable; and
(d) Entail oppression for those members seeking the company’s dissolution.
The concept of ‘oppression’ was judicially developed in English case-law to a considerable extent, most vividly in the House of Lords Judgment in Scottish Co-Operative Wholesale Society Ltd v. Meyer. It was held that the term entails behavior which includes lack of probity or lack of fair dealing towards the company’s members in relation to their rights as shareholders thereof. On the contrary, inefficiency or negligence in the conduct of the company’s affairs does not suffice to evidence oppressive behavior.
The exclusion of the minority shareholders from the company’s management and/or decision-making, in conjunction with the promotion of parallel and conflicting financial activity to those of the company, as well as acts leading to the extraction of the company’s assets against the minority shareholders, are the legal grounds supporting a petition to dissolve the company under s. 202 of Cap. 113.
Remedies Under s. 202, Cap. 113
Remedies sought under a petition under s. 202 in cases of minority oppression are prescribed by the section itself as being:
1. A Court Order for the regulation of the future conduct of the company’s affairs;
2. A Court Order for the purchase of the shares of any members of the company by other members of the company; and
3. 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 present article has identified the conditions under which Minority Shareholders in the Company can seek remedies or restitution for wrongs done to their detriment or to the Company’s detriment. Although the Courts are inevitably not willing to interfere in a Cyprus Company’s internal affairs, it remains to be seen whether the Courts shall create case law that further prescribes the conditions in which any party may be entitled to the discussed remedies in Cyprus.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.