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07 March 2016
There are many reasons why Cyprus courts refrain from interfering in the internal affairs of limited liability companies. At the core of the courts' approach lies the commercial reality that these matters are better understood and applied by a company's governing bodies (ie, its board of directors and shareholders) at the general meeting. However, as early as 1843 it was evident that there are times when court interference is required to create order in a company's affairs and end the oppression of minority shareholders when wrongdoers are in control. The latest amendments to the Companies Law (Cap 113) in July 2015 provided clarity to the operation of companies; it is worth examining the applicable rules of derivative actions in that context.
The board of directors of a company cannot bring a claim against wrongdoers controlling the company to prevent the oppression of minority shareholders. Instead, an oppressed shareholder can bring a derivative claim (ie, a claim made by a shareholder in the name of and for the benefit of his or her company) under common law and the rule in Foss v Harbottle that has been upheld and followed since 1843. The Foss v Hartbottle rule clarifies that the right claimant for wrongdoings against a company is the company itself. However, the rule goes a step further, stipulating applicable exceptions when a company is de facto controlled by wrongdoers and cannot bring such a claim to end the oppression of minority shareholders. These exceptions include the following:
Any shareholder can sue a company, its directors (including former directors), controlling shareholders or third parties participating in the wrongdoing with a view to protecting their rights. A derivative action is brought by the oppressed minority or those shareholders without de facto control of the company (regardless of their share participation) to redress wrongs committed against the company or recover money or damages allegedly due to the company. However, it is not the proper action to be used for every shareholder dispute. Damages recovered under a derivate action will be paid to the company and not to the shareholder bringing the claim.
The following options are available to minority shareholders:
Remedies for the oppression of the minority shareholders include a court order:
Cyprus civil procedure rules could benefit from an overhaul of the filing process for derivative actions similar to the two-stage test applied in the United Kingdom. In short, the applicant shareholder would be required to demonstrate in an application for the court's permission to hear the claim that there is a case at first instance and to provide evidence to this effect. This preliminary step would enable the court to decide at an early stage whether the claim is vexatious or unmeritorious and merely a measure to cause imbalance to the company's shareholders. The possibility of a costs order against the applicant shareholder could act as a deterrent for abuse of process.
For further information on this topic please contact Stella Koukounis at S Koukounis & Partners LLC - Solsidus Law by telephone (+357 99 415 708) or email (firstname.lastname@example.org). The S Koukounis & Partners LLC - Solsidus Law website can be accessed at www.solsiduslaw.com.
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