Corporate Conflicts & Disputes in Relation to Shareholders Agreements

is it Safe for Ukrainians in Cyprus?

By Nasos A. Kyriakides

Managing Partner

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Disputes over Shareholders Agreements

i. Shareholders agreements should include provisions for dispute resolutions and relevant court jurisdiction for such resolutions.

ii. Court proceedings and Arbitration are methods of dispute resolution in Shareholders Agreements.

iii. If agreement cannot be reached between the shareholders then dissolution of the partnership may be, so that both the assets and liabilities are crystallized.

Common Reasons for Shareholders Disputes are:

i. Breach of directors’ duties

ii. The company’s strategy & management

iii. Dividend policies

iv. Disparities between salaries

v. Separate business interests

vi. Failure to provide financial, accounting and statutory information

vii. Exclusion from meetings

viii. Breach of Shareholder’s Agreement

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Minority Shareholders Oppression

Minority Shareholders

Cyprus identifies the possibility that minority shareholders in a Company may become oppressed

or unfairly prejudiced against on behalf of the controlling or majority shareholders and/or the

Board of Directors.

Majority Shareholders

i. Should play everything by the book to avoid unnecessary claims against them.

ii. Should always observe statutory rules governing the management of the company.

iii. Ensure provision of appropriate financial information and voting procedures.

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Oppression under Common Law

In Re Five Minute Car Wash Service Limited (1966) 1 W.L.R. 745 the Court interpreted the notion and the requirements to establish “oppression” within section 210 of the UK Companies Act 1948 (which corresponds to section 202 of the Cypriot). It made particular reference to the foundations and stated that a claim for minority oppression must contain the following:

• at the time when the petition was presented, the affairs of the company were being conducted at least unfairly in regard to the petitioner or members of the company, including the petitioner

• the matters complained of must relate to the conduct of the affairs of the company;

• 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.

Not simply that 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.

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Oppression of Minority Shareholder

A. Common Law derivate actions where Minority shareholders rights may have been

disregarded.

Cyprus Courts having as per the Shareholders Agreement jurisdiction over the dispute, or having

personam jurisdiction, may accept filing such action the applicant must show that:

i. Exists “Fraud on the minority” is committed by the wrongdoing action of the Majority

Shareholders .

ii. The wrongdoers Majority shareholders, who committed the “fraud on the minority”

are in control of the company, and preclude any action for redressing such fraud.

Such derivative action can be brought by any Minority Shareholder including Ultimate Beneficial

Owner on his behalf, by the registered nominee shareholder, and such right is extended to

Cypriot and non Cypriot physical or legal person.

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B. Examples of wrongful behaviour constituting “fraud on minority”

i. Exclusion from the management of the business. ii. No entitlement to profit share or dividends. iii. Majority shareholders acting generally contrary to the minority’s interests or against the minority’s wishes for their own benefit.

C. Minority shareholders may be disqualified to file such derivative action if:

i. The minority shareholder has committed or participated in the wrongdoing amounting to the fraud against the Minority Shareholder. ii. When such derivative action is filed with intention to deceive or for other purpose, such as for personal revengeful purpose, or to exercise pressure harmful for the company.

D. Derivate actions for oppression of minority could be against any of the following wrongdoer:

i. Any shareholder of the company.

ii. Company director, previous director, or shadow director controlling decision making resulting to fraud.

iii. Any person participating in any way to such wrongdoing amounting to fraud against the Minority Shareholders.

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Available Remedies for unlawfully prejudiced

Shareholders A. Section 202 of the Companies Law, Cap. 113, provides protection to shareholders being

oppressed by Majority Shareholders.

Statutory right to file winding up petition before Cyprus Courts cannot restricted or limited by any Shareholders or other Agreement.

B. Winding up application of company on Just and Equitable Grounds:

i. Conduct of company’s affairs in a way to constitute oppression.

ii. Wrongdoing by Majority amounting to Fraud on the minority.

iii. Abuse by management of company of procedures, creating lack of confidence against it.

iv. Predicament providing deadlock with no alternative.

C. Conditions to be met:

i. Petitioner to be a registered shareholder at last 6 months before proceeding with petition.

ii. Petitioner should come to Court with clean hands, not with revengeful or deceptive intention.

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Alternative Countermeasure to Winding up Cyprus courts, may provide alternative remedy in the context of winding up petition in the event :

i. The Court is of the opinion, that the affairs of the company have been conducted, in a

manner oppressive, to inter alia, the petitioner. ii. That to wind up the company, would unfairly prejudice the petitioner, but otherwise the

facts of the case, would justify the issue of winding up order, on the ground that, it was just and equitable that the company should be wound up.

Such alternative remedies include inter alia:

i. To restrain the commission of any oppressive act, or the continuance of such oppressive conduct;

ii. To authorize that proceedings be brought in the name of the company; iii. To appoint a receiver, or manager, to the whole, or part of the company’s assets; iv. To regulate the conduct of the affairs of the company in the future (i.e.by the

appointment of an independent director in order to break the deadlock, to amend the articles of association etc).

Further remedy available in Cyprus is the appointment of inspectors, or investigators to investigate the affairs of the company following application of Shareholder to

i. The Council of the Ministers of the Republic; ii. The Court. iii. Any inspectors report delivered to the office of the Attorney General of the Republic, for

examination of possible commission of criminal offences etc.

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Shareholders Protection

Section 202 of Cap. 113 provide protection to a shareholder against whom the company's affairs

are conducted in an oppressive manner. The said statutory section is nearly identical to s. 210 of

the long repealed English Companies Act 1948 and as such Cypriot Courts rely heavily on English

case-law in exercising their judicial powers in cases of minority oppression under statute.

According to section 202, the Court can make the following orders:

i. An order regulating the conduct of the company's affairs in the future.

ii. An order for the purchase of the shares of any members of the company by other

members of the company.

iii. An order for the purchase of the shares of any members of the company by the

company and a reduction accordingly of the company's capital.

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Interim orders- Most Effective Remedy

Courts of Justice Law 14/1960, Conditions for Courts of Cyprus to grant any interim order Conditions to be addressed by the Applicant:

i. A serious issue exists, that is to be tried in relation to the main proceedings;

ii. It appears that the Applicant has a probability to obtain a favourable judgment in the main proceedings;

iii. There is a great risk that, if the interim order is not granted, it will be difficult or impossible for Justice to be served at a later stage; and

iv. The balance of convenience is in favour of the Applicant.

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Types of Interim Order Cyprus Courts can issue

i. Freezing Orders (Mareva Injunctions) on worldwide level

Over assets in any part of the world tangible (immovable property only if situated in Cyprus) and intangible assets (i.e. funds, deposits, shares, goods).

ii. Injunctions preventing acts or events from taking place:

E.g implementation of corporate resolutions, the convening of AGM or EGM. Such I.O. often issued within the context of shareholders disputes or derivative actions.

iii. Discovery and Tracing Orders (Norwich Pharmacal Orders)

Disclosure an oath by a respondent of the location and value of his assets, bank accounts, documents, regarding assets deprived or stolen from applicant.

iv. Appointment of Interim Receiver or Administrator

In the form of an ancillary relief in support of the protective regime imposed by a freezing order or any other interim order.

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v. Garnishee Orders (Chabra Orders) against a defendant other than the main defendant, if there are reasonable grounds that believed to a co-defendant is in a possession or control of assets to which the principal defendant is beneficially entitled.

vi. Search Orders (Anton Piller Orders) Courts which order a party to admit another party to the former party’s premises for the purpose of preserving evidence or property which is or may become the subject matter of the main proceedings:

• allow discovery and preservation of evidence held by defendant likely to be concealed or destroyed by the latter.

• identify and to obtain evidence against others involved with the principal tortfeasor in the tortuous activities.

• prevent the defendant from warning others to destroy or conceal evidence; • unvail further harm and damage to the applicant.

vii. Interim Orders in aid and/or support of Court or Arbitration proceedings conducted or to be conducted in Cyprus or abroad.

• Judicial or Arbitration proceedings pending before Cyprus Courts; • Judicial or International Commercial Arbitration proceedings pending before national courts of

any EU Member State (excluding Denmark) and non EU. viii. Article 31 of Regulation (EC) No. 44/2001 Cyprus Courts are enabled to issue any time interim order in aid and/or in support of court proceedings pending before the Courts of an EU Member State.

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Enforcement of Foreign Judgments in Cyprus

May be enforced under European Union Regulations, Statute, Common Law. Requirements:

i. the foreign judgment has been issued by a court which has jurisdiction in accordance with Cypriot rules on conflict of laws.

ii. the enforcement of foreign judgments is not contrary to Cypriot Public policy. iii. the foreign judgment has been made on merit and not according to procedure. iv. the foreign judgment has not been obtained by fraud and v. the proceedings which led to the issue of the foreign judgment were not contrary to

the laws of natural justice. Procedure: Enforcement and execution of foreign judgments in Cyprus, Law No. 121(1)/2000 in relation to the Recognition, Enforcement and Execution of Foreign Judgments applying to all cases in which recognition, registration and enforcement of decisions of foreign courts is requested. Section 5, requires an application by summons accompanied by an affidavit to be filed at the District Court and in accordance with the applicable Civil Procedure Rules in Cyprus.

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Enforcement of EU Judgments

EC Regulation No. 805/2004 - EC Regulation No. 44/2001

The main source of law is EC Regulation No. 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters. Grounds for Refusal of recognition and enforcement of judgment under Article 34 of EC Regulation No. 44/2001:

i. If contrary to the pubic policy of Cyprus

ii. If given in default of appearance and the Defendant was not served with the document instituting proceedings in good time or in a manner as to enable him to prepare his defence

iii. If inconsistent with earlier judgment of the Cypriot Courts between the same parties

iv. If recognition is inconsistent with earlier judgment given in another Member State or in a third State between the same parties regarding the same cause of action

Application of Law No. 121(1)/2000 and in the Foreign Judgment (Reciprocal Enforcement) Law.

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Enforcement of non-EU Judgments

Cyprus is signatory to a number of multilateral conventions relating to the recognition and enforcement of foreign judgments including :

1. the Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters

and Supplementary Protocol (Hague Convention).

2. Hague Convention on the service abroad of Judicial an Extrajudicial Documents in Civil or Commercial Matters 1965.

Article 5 of Hague Convention 1965.

The Central Authority of the State addressed shall itself serve the document or shall arrange to have it served by an appropriate agency e.g. Ministry of Justice of Ukraine , either

i. by a method prescribed by its internal law for the service of documents in domestic actions.

ii. by a particular method requested by the applicant, unless such a method is incompatible with the law of

the State addressed.

• Subject to sub-paragraph (b) of the first paragraph of Article 5, the document may always be served by delivery to an addressee who accepts it voluntarily.

• Cyprus is party to a number of bilateral treaties in relation to the recognition and enforcement of foreign judgments. Ukraine (Rat. Law 172/86 and 8/2005), Russia (Rat. Law 172/86), Belarus (Rat. Law172/86), Georgia (Rat. Law 172/86).

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Enforcement of Foreign Arbitral Awards

Foreign arbitral awards can be enforced in Cyprus

i. By virtue of provisions stated in the Cyprus International Commercial Arbitration Law No.101/1987 and

ii. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 which was ratified by Law No. 84/1979.

Enforcement of Foreign Arbitral Awards under the 1958 New York Convention

It is obliged to enforce awards made in foreign states that are signatories to the Convention, since Convention imposes an obligation on all contracting states to recognise arbitral awards as binding and to enforce them.

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Refusal for recognition and enforcement

Reasons for refusal of recognition and enforcement of foreign arbitral award under the New York Convention:

i. if Arbitration agreement is invalid under the laws of Cyprus or the laws of the country which it was made

ii. or the parties were incapable of entering into an arbitration agreement

iii. if the party against whom the award was made was not given proper notice of the appointment of the arbitrator or the proceedings

iv. or was not able to present his case

v. if the foreign award was outside of the arbitration agreement

vi. if the composition of the authority was not in line with the agreement of the parties or the applicable law where the arbitration took place

vii. if the award has not yet become binding on the parties or has been set aside or suspended

Recognition and enforcement of an arbitral award may also be refused by Cypriot courts if the subject matter of the arbitration is not capable for settlement under Cypriot law or if the subject matter violates the public policy of Cyprus.

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Thank You

Leoforos Spyrou Kyprianou, 67

KYRIAKIDES BUSINESS CENTER

4003 Limassol, Cyprus Tel.: +357 25 352 352 Fax: +357 25 352 353

info@naklaw.com www.naklaw.com.cy

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