Protection of Minority Shareholders

Cypriot Legislation – Protection of Minority Shareholders:

The main protection for a minority shareholder in a company whose rights are being oppressed is provided by the Cypriot Legislation, specifically the Companies Law Cap. 113. This legislation grants the minority shareholder the ability to seek the company’s liquidation (based on the Articles 209, 211(3), and 214 of Cap. 113) but also provides alternative remedies under the Article 202 of Cap. 113. These remedies may include:

1. Arrangement for future conduct of the company’s affairs (amendment, alteration, or addition to the articles of association or the memorandum of association) or
2. Purchase of shares from any other members of the company or
3. Purchase of shares by the company itself with a corresponding reduction of its share capital.

Requirements for Alternative Remedy (apart from liquidation) based on the Article 202 of Cap. 113:

1. Firstly, when the liquidation of the company would adversely affect the Applicant but otherwise, the circumstances would justify the issuance of a liquidation order on the grounds of fairness and according to the principles of equity, as the company’s liquidation is fair and reasonable.
2. The company’s affairs are conducted in an oppressive manner by some members of the company (including the Applicant himself), or
3. The company’s operations are carried out with the intention to defraud its creditors or the creditors of any other person, or otherwise with deceitful or unlawful intent or in a manner that oppresses any part of its members, or that it was established with deceitful or unlawful intent, or
4. The individuals involved in its formation or the management of the company’s affairs are guilty of fraud, misfeasance, or other misconduct towards it or its members.

The term oppression of the minority:

The term “oppression of the minority” is interpreted and defined based on fundamental decisions of the Supreme Court. These decisions include Bedros Karaoglanian & Sons Ltd and Others v. Hagop Karaoglanian and Another (1974) JSC 488 and In Re Pelmaco Development Ltd (1991) 1 ΑΑΔ 246, which were later adopted in the relatively recent decision of the Supreme Court, dated 17/10/2018, OM INVESTMENTS & FINANCE LIMITED et al. v. LAPWING LIMITED, Civil Appeals No. 195/2012 and 196/2012, 17/10/2018. These cases analysed under which circumstances the oppression of the minority can be considered, drawing guidance from the case Re Five Minute Car Wash Service, Ltd., [1966] 1 All E.R. 242, where it is explained that the Applicant’s complaint:

1. Must concern the rights of the company’s members.
2. Must be related to the management of the company.
3. The liquidation must not only the company fair and reasonable but also constitute oppression for those seeking the company’s liquidation, considering the manner in which the company is managed.

The term “oppression” is further explained in the decision of the judicial committee of the House of Lords in the case Scottish Co-Operative Wholesale Society Ltd. v. Meyer [1958] 3 All E.R. 66; (1959) A.C 324. The term includes conduct that involves a lack of probity or fair dealing towards the members of the company concerning their rights as shareholders.

On the contrary, inefficiency or negligence in managing the company’s affairs does not constitute oppressive behaviour.

In summary, the Supreme Court concluded that the following events constitute oppression of minority shareholders:

1. The management of the company was for the exclusive benefit of the majority.
2. General meetings were not convened.
3. Accounts were not submitted.
4. Necessary records were not maintained.
5. No dividends were given to the shareholders, along with the fact that the spirit was incompatible with trust and the cooperative spirit on which the company is based, and therefore, the submission of an application under the Article 202 of Cap. 113 was deemed justified.

The term “oppression” was analysed in the Report of the Company law committee. Great Britain. Company Law Committee.; David Llewelyn Jenkins Lord Jenkins., London: H.M.S.O. 1962 «the meaning of “oppressive” adopted the dictionary meaning of “burdensome, harsh and wrongful”. This is probably as good a definition as any other which could be devised, but it is to be observed that a question remains as to the degree of culpability required to satisfy the element of “wrongfulness”. Does it postulate actual illegality or invasion of legal rights or is it satisfied by conduct which without being actually illegal could nevertheless be justly described as reprehensible?  The outcome of Meyer’ s case indicates the broader view. And in our view, if the section is to afford effective protection, it must extend to cases in which the acts complained of fall short of actual illegality».

The term “oppression” Pennington’s Company Law, 8th edition (July 31, 2001), on page 594 is characterised by an “unconscionable use” of the majority’s power, leading to economic loss, unfair treatment, or discrimination against the minority. It is also necessary to demonstrate some element of impropriety or at least unlawfulness.

The interpretation of “just and equitable”:

Regarding the interpretation of “just and equitable” to wind up a company, the Palmer‘s Company Law, Edition 1993, p.15073-4 explains that this term has been analysed through case law in several circumstances where it is deemed “just and equitable” to wind up a company. Some of these circumstances include:

1. The company’s substratum has disappeared.
2. The company was established as a bubble.
3. The company was formed for fraudulent purposes.
4. A full investigation of the company is necessary.
5. The articles of association provide for the company’s winding-up in specific circumstances that have occurred.
6. Majority shareholders refuse to submit accounts or pay dividends.
7. The applicant is excluded from any participation in the company’s business.
8. The company is in a complete deadlock.

Moreover, in the Pelmaco case, the terms “just,” “equitable,” and “equity” were analysed as the basis for the winding-up application. The “equitable” element introduces the principles of equity, aiming to limit the abuse of rights. The fall of the cooperative spirit among partners provides a basis for the company’s dissolution if deemed just and equitable. The term “equitable” connects the exercise of rights provided by the company’s articles of association with the level of behaviour that should characterise the good-faith exercise of rights and fulfilment of obligations.