Corporate governance involves the internal controls, secured management and monitoring of the Board of Directors ensuring smooth running of private and public companies aiming for the protection of shareholders/investors or even creditors. Below is a summary of certain areas of corporate governance issues in Cyprus.
Main corporate governance sources in Cyprus:
- The Companies Law Cap 113 (“Legislation”).
- The Cyprus Securities and Stock Exchange law of 1995.
- The Cyprus Securities and Stock Exchange (Public Offer for the Acquisition of Securities and Merge of Companies Listed on the Stock Exchange) Regulations of 1997 (“the Regulations”)
- The Corporate Governance Code (2nd Edition) March 2006 (“the Code”) which recommends the best practice for listed companies to confirm with internationally accepted rules of corporate governance. Although the Code is not compulsory, most listed companies in the market are in full compliance with the Code.
Shareholders’ rights in the operation and management of the company
The shareholders rights derive (a) from legislation and (b) from within the constitution of the company; such rights can be exercised though voting at the General Meeting. In the event of a Trust Deed in place, i.e. the beneficial owner not being the registered shareholder of the company but a nominee (trustee) shareholder is appointed instead, such Trust Deed safeguards the rights of the beneficial owner and regulates the relationship between the two parties (Trustee & Settlor (beneficial owner)) whereby ithe beneficial owner has the total control and regulates the operation and management of the company, under contractual and fiduciary obligations that the trustee is obliged towards the beneficial owner.
Public companies must within three months from commencement of business, hold a general meeting of the members of the company (“the statutory meeting”).
All Cyprus companies must hold the first Annual General Meeting (AGM) within 18 months of its incorporation and within 15 months thereafter. A notice of the AGM is sent to all company members containing details such as the date, time, place and agenda of the meeting. Normally 21 day’s notice is required for the holding of an AGM unless otherwise agreed by all voting members.
Any other meeting of members conducted throughout the year is called an Extraordinary General Meeting (EGM).
The notice period required for an EGM depends on the type of resolution(s) to be proposed at the meeting; special or ordinary resolution(s) can be proposed and voted.
In case of a special resolution, notice of minimum 21 days must be given, subject to exceptions (i.e. removal of director requires 28 days). A special resolution is such which has been passed by a majority of not less than 75% of the votes.
In case of an ordinary resolution, notice of minimum 14 days must be given.
Procedure during Meetings
A quorum of members must be present in order to constitute a general meeting (“GM”). The quorum threshold is usually set in the company Articles.
Every member of a company with voting rights may appoint a proxy to attend and vote in its’ place. Unless the Articles otherwise provide, resolutions at a GM are in the first instance voted on by raising hands. Members have the right to demand a poll vote on any question other than the election of a chairman or adjournment, or a question which specifically requires a demand for poll. Any provision in the Articles excluding such a right is void.
Legislation requires that Minutes of all general and directors meetings be made up.
The Code states that the purpose of an AGM is to communicate with investors/shareholders and encourage their participation. The Chairman of the Board should make sure that the chairmen of the Audit, Remuneration and Nominations Committees of a company are available to answer questions at the AGM. Proposals which are submitted are adequately and clearly explained to shareholders who should be given sufficient time before the meeting to evaluate them.
Calling a shareholder meeting
A shareholder with not less than one tenth of the paid-up capital of the company may request an EGM through signing a requisition and depositing it at the company’s registered office.
Shareholders’ electronic communication is nowadays common and possible if provided for by the Articles of the company or voted for at the GM.
Shareholders’ liability on company’s debts
A company is a separate legal entity. Members do not have any personal liabilities for the company’s depts. Liability is limited to the price of the shares held by them.
Shareholders’ rights against the management body
Any shareholder who believes that the company affairs are being conducted in an oppressive manner as against to any member may submit to Court a winding up petition under section 202 of the Companies Law. Upon such petition, the Court has unfettered discretion to make such order as it thinks fit.
Legislation further allows for a minority of 200 or more members of a company having a share capital to apply to the Council of Ministers for the appointment of a competent inspector to investigate into the affairs of the company.
In respect of membership rights, the principle of the supremacy of the majority applies. This is known as the rule in Foss v Harbottle.
The Management Body
According to legislation, members are free to determine how and by whom the business of the company shall be managed, however it is most unusual for the Articles of a company to provide for anything other than the Board of Directors to manage the company. At least 2 directors must be appointed for a public company and 1 for private.
Appointment and removal of directors
Directors are appointed by an ordinary resolution of the members or by a resolution of the Board. The removal of a director before expiration of it’s’ period in office can be achieved by an ordinary resolution (28 day notice is required).
Interests in securities held by members of the management
Directors have a statutory duty to disclose to the Board their interest including the nature of this interest, whether directly or indirectly, in a contract or proposed contract with the company.
Directors’ legal duties and liabilities
Legislation contains protective provisions for directors, similar to those accorded to trustees. A director must act honestly and act at all times in the best interests of the company, not make a secret profit, not exceed or abuse their powers and must use skill and care when exercising all duties. Extensive list of legal and disclosure duties of Public companies’ directors are provided by the Code and the Cyprus Stock Exchange Law 1995. Indemnities or insurance may be permitted under the service contract of the director, or as approved in general meeting.