Introduction
A minority shareholder is a shareholder whose voting or shareholding interest is insufficient, whether individually or together with other shareholders, to exercise control over the management or decision-making of the company.
In practical terms, this generally means a shareholder who holds less than 50% of the voting rights of the company, although the precise position depends on the particular company’s articles of association, the rights attached to different classes of shares, and any shareholders’ agreements in place.
Although a minority shareholder has limited direct influence over the decision-making process of a company by virtue of their minority shareholding, the Companies Law, Cap. 113 (the “Law”), provides minority shareholders with statutory protections, as outlined below.
Rights of Minority shareholders
The statutory rights of the minority shareholders are, inter alia, the following:
- Voting rights
- Access to information
- Right to dividends
- Right to attend general meetings
- Pre-emption rights
- Right to request convening of general meetings
- Right to file Petitions to Court
Just and Equitable Winding-Up (Last Resort)
If the relationship between shareholders has irreparably broken down, especially in small or quasi-partnership companies, minority shareholders may file a petition for the company to be wound up on the “just and equitable” ground under Section 211(f) of the Law.
The compulsory liquidation on the just and equitable ground should be considered as the last and inevitable resort, and thus the Court should be convinced that there is no other remedy or measure which could reasonably rectify the situation.
Unfair Prejudice Remedy for Oppressive Conduct
Any member of a company who complains that the affairs of the company are being conducted in a manner oppressive to some of the members (including itself) may apply to the Court for an order under Section 202 of the Law.
If, upon examination of an application submitted by a minority shareholder to the Court for oppression, the Court is of the opinion that the company’s affairs are being conducted in a manner oppressive to some of the members and that the winding up of the company would unfairly prejudice that part of the members, but that otherwise the facts would justify the making of a winding-up order on the ground that it is just and equitable that the company should be wound up, the Court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit, whether for regulating the future conduct of the company’s affairs, or for the purchase of the shares of any members of the company by other members of the company or by the company itself and, in the case of a purchase by the company, for the consequent reduction of the company’s capital, or otherwise.
According to the case law, the term oppression includes behavior that involves a lack of probity or fair dealing towards the members of the company concerning their rights as shareholders. In contrast, inefficiency or negligence in the management of the company’s affairs does not constitute oppressive behavior but breach of duty which can be remedied through a derivative of personal action by the minority shareholder, as set out hereinbelow.
Derivative Actions for and on behalf of the Cyprus company
A derivative action constitutes an essential legal mechanism which enables the shareholders of a Cyprus company to bring claims for and on behalf of a company, when those in control fail to act in the best interests of the company.
When minority shareholders are of the opinion that the company suffers harm due to misconduct or mismanagement by the directors or majority shareholders, but the company itself cannot proceed to take legal action, they may file a derivative action which allows a minority shareholder to sue in the name of the company.
The remedies sought by the derivative actions include, among others, damages or remedies for the benefit of the company and not for the benefit of the minority shareholder, as for example the recovering of misappropriated funds. To this end, a derivative action is often combined with oppression claim, the latter being filed for the benefit of the minority shareholder.
Personal Action
A shareholder whose personal rights have been infringed can take a personal action (civil action/lawsuit) against the company or individual shareholders, for reasons such as breach of duty, illegal conduct, acting outside the scope of the company’s permitted activities, and not complying with the applicable laws and proper procedures.
Successful claims may result in damages or other remedies payable directly to the affected shareholder.
This article is intended to provide general information and does not constitute legal or tax advice. Specific advice should be obtained in relation to the circumstances of each case.
For further information or legal assistance regarding compliance with the above requirements, please do not hesitate to contact us at info@kpklegal.com
Author
Pantelitsa Nikolaou
Advocate/Partner, KPK Legal