The concept of a 'golden share' dates back to the 1980s and is believed to have been created by the British government, which devised this protection instrument to:
- maintain control of newly privatised companies as they adjust to the free market environment; or
- prevent takeover by overseas shareholders of private companies operating in strategically important fields of national interest.
Following their introduction in the United Kingdom, golden shares were widely used in the 1980s and 1990s by governments of other European countries and the Russian Federation as part of the privatisation process. In Russia, the term golden share was enshrined in law in 1992.
Cypriot company law is silent on the rights enshrined in golden shares. However, case law (primarily English case law) provides that golden shares represent a separate class of shares, which enable holders to exercise veto rights by having weighted voting rights on specific matters.
Golden shares do not always mean actual share participation, but they allow the holder of such an instrument to block unwanted key business decisions or corporate actions taken by the company, either by:
- participation in directors or shareholders meetings with a decisive vote; or
- exercising veto power on decisions by the board of directors or shareholders.
Since 2003, European courts have challenged a number of golden share applications by governments in the United Kingdom, Portugal, Italy, Spain and Germany, finding them contradictory to the EU principle of the free movement of capital. This has resulted in a noticeable reduction in the popularity of golden shares among EU governments.
However, for private businesses, golden shares can be more easily considered in the context of contractual relationships and free will agreements between shareholders or other counterparties. Here, golden shares can again be used to block certain corporate actions, such as:
- changes to a company's memorandum and articles of association;
- mergers; and
- the sale or purchase of a company's shares unless particular conditions are met.
In the financial sphere, golden shares can sometimes be requested by a lending financial institution for the duration of the lending period as an additional guarantee and control instrument over the borrower and its adherence to contract specifications.
As with any shareholders' agreement, a golden share application needs careful planning and consideration. An important means to have a golden share recognised as authoritative is to support the principle of exercising it in a company's best interest, which means that its application should be approved by a special resolution or agreement. Golden share restrictions must be:
- disclosed to new board members before they join a company; and
- objective and proportional to the benefits that they bring to a company.
In practical terms, golden shares in private companies are most commonly applied through:
- the creation of a specific class of shares in a company's memorandum and articles of association; and
- the attachment of the desired rights to such class (eg, the right to attend and vote at company meetings).
Articles of association generally specify any variation of class rights and the procedure of such variation for an additional security so that a golden share arrangement is maintained. Golden share restrictions, the rights attached thereto and relations between the holders of a golden share and remaining shareholders can also be fixed by the relevant shareholders' agreement. In the case of a discrepancy between the rights provided in the articles of association and the shareholders' agreement, the articles of association prevail.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
For further information on this topic please contact Stella Koukounis at Solsidus Law by telephone (+357 22 007700) or email ([email protected]). The Solsidus Law website can be accessed at www.solsiduslaw.com.
