Although the Cyprus Company Law is based on the principle of the majority rule, it provides some protection to the minority shareholders, recognizing that they may be oppressed by the controlling or majority shareholders and/or the board of the Company.
Principle of the Majority Rule – The Rule in Foss v. Hartbottle
According to the Rule in question in order “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“. For any wrong perpetrated against a company, the company itself should file a claim, meaning that the decision is to be taken by the majority of the board of directors of the company or the shareholders or both. It is worth to be noted that Courts normally do not interfere in the internal management of companies.
The Exceptions to the Rule
However, in case of violation of the minority shareholders’ rights, exceptions to the aforementioned Rule can be applied.
- Ultra vires and illegal acts : The doctrine in the law of corporations that holds that if a corporation enters into a contract that is beyond the scope of its corporate powers, the contract is illegal.
- Acts for which a special majority (75 %) is required, for instance a special resolution, is required but which are carried out by an ordinary resolution. For example, the amendment of a company’s Articles of Association can be carried out by a virtue of a special resolution requiring a special majority.
- Acts infringing a shareholder’s personal rights. In this case, the denial of a personal right is a wrong done to the shareholder in his capacity as such and not to the company.
- Acts of fraud committed against the minority shareholders by those in control of the company. A minority shareholder can sue when the board uses its powers in a fraudulent manner which benefits the board to the detriment of the company.
Actions that can be taken:
Two options are available to the minority shareholders:
- A personal action against the company can be filed due to a breach of duty by the company.
- A derivative action can be filed, provided that there has been a fraud perpretrated against the company, which is controlled by the wrongdoers. In this case the minority shareholders file a claim on behalf of the company. The damages recovered will be given to the company.
Remedies provided by the Cyprus Company Law s.202, Cap. 113
Among the remedies that can be sought are the following:
- A Court Order regulating the future conduct of the company’s affairs;
- A Court Order for the purchase of the shares of any members of the company by other members of the company;
- 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.
If you are interested in obtaining a legal advice on minority shareholders’ protection in Cyprus, you can get in touch with our lawyers.