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Minority Shareholder Oppression in Cyprus: An Overview

Contributed by Oxford Tax Solutions
03 November, 2020


Introduction

Based on the principle established in Salomon v Salomon, a company upon its incorporation acquires a legal personality separate from its members. Among others, the company is responsible for its own debts and obligations and it also has the right to sue in its own name as well to be sued. The powers of the companies are exercised by the general meeting of its shareholders and its board of directors, who are its two management bodies, both of which usually take decisions based on the majority of votes.

This illustrates one of the fundamental principles of democracy, the majority rule. Those that have control of more than half of the votes of the board or shareholders' meeting, essentially have control of the company as well. When one decision, is approved by more than 50%, is adopted. This procedure, favors the majority and similarly in companies, the party controlling more than 50% of the shares is significantly in an advantageous position. Hence, the shareholders of a company that have less than 50% of the shares, must in most cases, accept the decisions taken by the majority.

The Companies Law, Cap 113 (the "Law"), to protect the minority shareholders has taken some measures, such as requiring a company to pass a resolution with more than 75% approval by the shareholders instead of 50%, in certain matters. However, the Law must keep an exquisite balance. On the one hand, it must allow a company to operate in accordance with its articles of association, namely that the decisions are to be taken by the majority shareholder. On the other hand, it must protect the minority shareholders from oppressive behavior towards them by the majority.

As a general principle, a court will not interfere in the management of a company as this is handled either by its board or its shareholder. In cases where a shareholder has reasonable grounds to believe that it is being oppressed by the majority shareholder or the board of the company, then it can seek protection from the court. However, the Law does not indicate any express provisions as to what happens when a minority shareholder wishes to sue the majority shareholder for an alleged wrong in the company. This issue was explored in Foss v Harbottle.

The rule in Foss v Harbottle and its exceptions

The basic principle in Foss v Harbottle is that the proper claimant in litigation for a wrong done against the company, is the company itself. This is known as the "rule in Foss v Harbottle". If a minority shareholder, has a claim against the majority shareholder or the board, since the company itself has to sue them, it is indisputable and undeniable that the majority will not vote for the initiation of such procedures.

The strict implementation of the rule could lead to severe implications because a member could effectively be prevented from insisting that the company conducts its affairs in compliance with its articles. Furthermore, it could be seen an opportunity to promote the interest of the majority shareholder, to the detriment of the minority shareholder. The concerns associated with the complications of the rule, lead to the formulation of exceptions to its strict application. The courts have developed and established specific exceptions to the rule in Foss v Harbottle, acknowledging that if the right of minority for court action was denied, their compliant would never reach the court and justice could not be served.

The exceptions as specified in Edwards v Halliwell are as follows:

1. Acts that are ultra vires or any actions that are illegal

This entails with any actions done that are outside the powers of the company and any illegal action under any law.

2. Transactions which require a qualified majority but are being taken with less of the required majority

For example, when an act requires for a special resolution for it to be passed but it is carried out by ordinary resolution.

3. Where the personal rights of a specific shareholder have been violated

Breaching of a personal right of a shareholder is wrong done to the shareholder and not to the company. The shareholder has the right to recover damages by the company in case the claim is successful.

4. Where the act constitutes minority fraud and the offenders control the company

The term fraud has been widely interpreted by the courts and in broad terms is interpreted as dishonest behavior. According to Lord Davey in Burland v Earle, fraud embraces all cases where the wrongdoers are "endeavouring directly or indirectly to appropriate to themselves money, property or advantages which belong to the company, or in which the other shareholders are asked to participate.'' This was adopted in the Cypriot case of Thoma v Iliadi by the Supreme Court of Cyprus.

The minority shareholder has the following options as to how the claim of minority oppression shall be filed to the courts:

  1. A personal action by the minority shareholder against the company can be filed due to a breach of duty by the company; and
  2. A derivate action by the minority shareholder on behalf of the company against the majority shareholder and/or its directors and officers. This action entails that there has been fraud or wrongdoing towards the company and any damages will be for the benefit of the company not for the individual shareholder that filed the claim.

In such derivative actions the company has to be added as a defendant in the action, otherwise the action cannot be proceeded. Specifically, as A L Smith LJ stated "for without the company being made a party to the action it could not proceed because the company must be party to the suit in order to be bound by the result of the action and to receive the money received in the action."

It is remarkable to mention the case of Pirillis v Kouis where the shareholder, who was not the minority shareholder but the holder of 50% of the shares (there was another shareholder with 50% as well), can proceed with a derivative action if he can prove that based on the circumstances, had an objective inability to activate the internal mechanism so that the company could sue. In other words, the claimant could not vote for the company to initiate legal procedures at a general meeting since he was prevented by the other shareholder who had the same percentage of shares.

Interpretation of oppression by Cyprus Courts

Cyprus courts have adopted the following in relation as how the oppression is interpreted and used. Oppression does not have to be a civil offence. It has to be consisted of unconscionable use of the majority, which leads or could lead, either to financial damage either to unfairness or discrimination towards the minority. It has to be proved that decisions of the majority have not been taken as bona fide and for the benefit of the company as a whole. The element of dishonesty is required as well. In the case of Scottish Co-Operative Wholesale Society v Meyer, the term oppression includes a behavior which involves lack of probity or fair dealing in relation to the rights of the shareholders. On the other hand, inefficiency or negligence in the management of the affairs of the company, does not document oppressive behavior. Claims of oppression need to be of a serious nature while isolated incidents of mismanagement by the directors are not substantial.

The court made extensive reference to oppression in Re Five Minute Car Wash Service Limited where the court interpreted the requirements to establish oppression (which were later adopted by Cyprus courts in relation to section 202 of the Law as analyzed below) as follows:

  1. the matters complained of must affect the petitioner and his character as a member of the company;
  2. the matters complained of must relate to the conduct of the affairs of the company; and
  3. the matters complained of must be such as not only to make the winding up of the company just and equitable, but also to lead to the conclusion that the affairs of the company are being conducted in a manner which can properly be described as "oppressive" against the petitioner.

Just because a member had lost confidence in the manner in which the company's affairs were being run or had been outvoted or was dissatisfied with or disapproved of the conduct of the company's affairs on grounds of policy or efficiency does not mean that there is oppression towards this member.

Available remedies to minority shareholder oppression

Statutory protection for minority shareholders is offered by sections 202 and 211 of the Law.

Section 211 (f) of the Law, secures the right of any shareholder, that is allegedly oppressed, to petition to the court for the winding up of the company on the ground that it is just and equitable to do so.

The just and equitable ground has been interpreted by the courts as to cover inter alia, deadlock situations, lack of trust and confidence on the management, oppressive conduct of the majority over the minority, fraud on the minority, when the company was a bubble, when the purpose of the company was gone etc.

The petitioner's application can be rejected, if he comes before the court with unclean hands (eg. if he was responsible for the deadlock or if he committed the wrongs or he was party to the wrongs) as indicated in the case of MCP International Paint Limited, where the petitioner presented a tailored image in order for his application to be successful when in reality this image did not respond the actual events.

In considering whether it is just and equitable that a company should be wound up, the court must be careful not to allow itself to be made an instrument for relieving the petitioner from the natural and lawful consequences of his own contracts. The court will not order for the wind-up of the company if it determines that the petitioner has a better remedy.

Section 202 of the Law offers an alternative statutory remedy. In cases where this section is used the courts have jurisdiction to issue an alternative remedy, instead of the winding up of the company, if the they decide that the following are applied:

  1. That the affairs of the company are carried out in an oppressive manner against the minority shareholder; and
  2. That the court would justify to issue an order for the wind-up of the company, on the basis that it would be just and equitable to do so, but the wind-up of the company would be unfair to the minority shareholder.

The courts are free to order a remedy they believe is the most suitable depending on each case. Any remedy under section 202 has to be tailored to the specific case and the power of the court is wide as well as its inventiveness. The goal of the court is to issue the correct order under the specific circumstances. Some examples are the issue of an order regulating the affairs of the company or for the purchase of minority shareholder's shares by the majority shareholder or for the amendment of the articles of the company curing the disputed issue.

In order for the oppression in question to be remedied, it must be clear that the liquidation of the company will not in fact better serve the interests of the oppressed shareholder but will instead be more unfavorable and to the detriment of the same.

The requirements of oppression mentioned above in Re Five Minute were interpreted in section 202. However, the courts will refuse to give the alternative remedy under section 202 where the complaints of the petitioner could be remedied by the issue of an injunction or award of damages or where the petitioner does not come to the court with clean hands or where the petitioner has delayed unjustifiably to claim for a remedy which shows that the petitioner has accepted the situation which he complains about.

Conclusion

Minority shareholders have very limited ability to control the direction of the companies in which they hold an interest. But despite this vulnerability, minority shareholders are not without options. Recent case law proves that the Cyprus courts are willing to interfere in cases where the minority shareholders are being oppressed by the majority, with each case being treated differently so that the most appropriate solution is found.




 


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