Cyprus company law went through some extensive developments over the past few years: a series of harmonisation amendments, the adoption of provisions relating to the European Company, the introduction of the ability to transfer the registered office of companies and developments relating to the adoption of the Euro. This report presents a description of these developments. It starts with a brief introduction to Cypriot Company law and then gives a short account of the harmonization efforts. Subsequently, it focuses on the recent developments in the legislative and regulatory fields. The approach followed is not limited to developments from a pure company law point of view but takes into account broader perspectives such as corporate governance matters. This report does not engage in critical analysis of the law but rather sketches the regime and outlines the recent developments.

SOMMARIO:

1. Introduction into Cypriot Company Law - 2. The EU dimension: Developments prior to Accession to the European Union. - 3. Legislative developments - 4. Regulatory developments - 5. Conclusion - NOTE

1. Introduction into Cypriot Company Law

Cyprus is quite a unique jurisdiction as far as company law is concerned. The history, the legal system and market structures are all significant factors contributing to the development of company law as it stands. The main statutory instrument relating to company law is the Companies Law as amended, Chapter 113 of the Laws of Cyprus (Cap. 113) (hereinafter called the Companies Law), which is almost identical to the English Companies Act of 1948 that was incorporated into the laws of the Republic of Cyprus and was amended several times over the years [1]. Cyprus is a common law jurisdiction. Though some fields are codified, principles derived through case law are still binding on the courts. Where there is no statutory enactment, common law principles are applied. Consequently, the evolution of company law has been greatly influenced by principles derived in English case law [2]. The Cypriot company law adheres to the main universal attributes of corporate entities: compa­nies have a separate legal personality, members have limited liability and are considered the “owners” of the company, shares are transferable [3] and management is delegated to the directors. There are two forms of limited liability companies under the Companies Law: companies limited by shares and companies limited by guarantee. Companies limited by shares may be either private or public. The Companies Law regulates the relationship between the members and the relationship between the ownership and management. The ultimate aim is shareholders value maximisation. Like other common law jurisdictions, Cypriot company law is hardly concerned with other stakeholders [4]. It is noteworthy however that the ownership structures evolved in Cyprus tend to be similar to the ones in civil jurisdictions rather than in common law jurisdictions [5]. The vast majority of ownership structures seems to involve concentrated shareholdings taking the form mostly of either blockholders or family majorities. Different explanations exist for this phenomenon: Cyprus has no well developed and liquid financial market, the Cypriot economy is largely based on small and medium size firms, and there is a strong family business culture [6].

2. The EU dimension: Developments prior to Accession to the European Union.

Prior to the accession to the European Union (EU), Cyprus had to adopt the acquis communautaire of the European Community [7]. The method chosen was the integration of provisions, giving effect to the Company Law Directives with the existing Companies Law, through a series of adjustments or additions. Significant developments in corporate law took place as a result of this process of harmonization. The incorporation of single member private companies is now possible under the Companies Law. The Companies (Amending) Law of 2000, N.2(I)/2000, which was the first amendment in the process of harmonization, brought the Companies Law in line with some requirements of the Twelfth Company Directive [8] introducing the incorporation [9] and regulation of such companies for the first time. The conditions under which a company may buy or acquire its own shares (section 57A), the exceptions to the rule (57B), the obligation to transfer shares if acquired contrary to the provisions of the Companies Law (section 57Γ) and the conditions under which a company may hold its own shares (section 57Δ) were introduced by the Companies (Amending) (No.2) Law of 2000, N.135(I)/2000.   Third party protection in transactions entered into after the incorporation of the company was the most important change introduced by the Companies (Amending) (No.3) Law of 2000, N.151(I)/2000 [10], which implemented partly the First and Twelfth Company Directives [11]. Under the new section 33A(1), any action or transaction, in which the company enters into with third parties and is beyond its objects, is binding on the company, except where the company proves that the third party knew or could not, under the circumstances, be unaware that it is beyond the company’s objects [12]. Unlike this, the previous version of section 33A hardly secured any third party protection if directors acted beyond their powers as it provided that any transactions between authorized directors and third parties acting in good faith were binding on the company except if there was an express restriction of such power in the Memorandum or Articles of Association or the law. The amendment brought effectively an end to the defence of ultra vires that had been already weakened by case law [13]. The requirements imposed by the Eighth Company Directive relating to appointment of company auditors as well as [continua ..]

3. Legislative developments

Developments after EU accession Not very significant developments occurred in the first few years following the accession to the EU. First was the Companies (Amending) Law of 2004, N.92(I)/2004 relating to the deadline for auditors’ licence for the purposes of the Companies Law. Next was the Companies (Amending) Law of 2005, N.24(I)/2005, that amended section 4 relating to the name of companies. This section was later amended by the Companies (Amending)(No.2) Law of 2005, N.129(I)/2005 [21] allowing further endings as well as the option for the endings to be written in English where the name of the company is written in Latin characters. Following the amendments of Directive 2003/51/EC to previous Directives [22], the Companies (Amending) (No.3) Law of 2005, N.130(I)/2005 brought the Companies Law in line with the new requirements relevant to the annual financial statements of companies.   Developments in 2006 The introduction of the European Public Limited Company, the Societas Europaea (SE) [23] in the Cypriot Companies Law by virtue of the Companies (Amending) Law of 2006, N.98(I)/2006 was the first development in 2006. The Law made minor amendments to the Companies Law in order to make it compatible with Council Regulation (EC) 2157/2001 on the statute for a European Company [24] and in order to ensure easier enforcement of the Regulation in Cyprus. Firstly, the definition of the SE was added in section 2 of the Companies Law and section 4(1), was amended so as to provide also for SEs. Secondly, the prohibition to trade or carry on business under a company name or title that does not mention the word “limited” or a relevant abbreviation, in section 374, was extended to SEs. In addition, the jurisdiction of Cypriot courts to wind up a company under section 211 was widened to cover SEs. Winding up, however, must take place in accordance with the governing Regulation. Lastly, the directors of a SE must make a declaration of solvency [25] if there is to be a transfer of the registered office. Some subsidiary legislation was set up concurrently with the enactment of Law N.98(I)/2006 [26] regulating procedural matters such as the relevant forms to be submitted to the Registrar etc. The Law N.98(I)/2006 together with the subsidiary legislation constitute a great development in the corporate legal regime and business environment because they effectively [continua ..]

4. Regulatory developments

The adoption of the second version of the Corporate Governance Code (the Code), which came into force in May 2006, was the main development on the part of the regulators. Some amendments to this version were introduced in January 2007. The new version replaced the first Code [76] but follows the same structure: it is divided in four parts that relate to the directors, remuneration, accountability and audit and relations with shareholders. There were, however, additions and amendments worth to comment on. Compliance with the Code is not compulsory for all listed companies [77] but all must include a Corporate Governance Report in their Annual Report [78]. Concerning the directors, the role of non-executives was strengthened. Rule A.2.2 states that executive directors must be represented at the Board with the exception of investment organizations which have a fund manager. Important were the changes in rule A.2.3 establishing differentiated requirements according to the market in which the company’s securities are traded: at least half of the board of companies, whose securities are traded in the Main Market or the Market of Big Projects or the Market for Shipping, excluding the Chairman, must consist of independent non-executive directors otherwise company must explain in the Corporate Governance Report. The Board of the CSE may give reasonable time to the company for compliance. In the boards of other companies, the majority of non-executive directors or at least two persons must be independent. One can observe that for the first group, at least half of the directors, excluding the Chairman, must have a double capacity i.e. independent and non-executive. Instead for the second, the minimum requirement refers to the majority of non-executive directors or at least two persons having a double capacity. In rule A.2.3 further criteria [79] were added relating to the minimum requirements of eligibility as an independent non-executive director covering: the non-employment in the company or the group for a period of five years before appointment, the non existence of substantial business relationships [80] with the company potentially influencing independency and impartiality for a period of three years before appointment, business or family relationships with advisors of the company, cross directorships with the other directors through involvement in other companies and a maximum [continua ..]

5. Conclusion

Cypriot company law has not been static over the past years. With the statutory amendments harmonizing Cypriot company law to the acquis communautaire, Cyprus fulfilled its obligations and modernized some aspects of the law. The amendment relating to the SEs, though not an innovation of the national law, contributes to the effective application of EU law. Likewise the changes relating to the adoption of the Euro were necessitated in order to attain obligations to the EU. The amendment relating to the prohibition of loans to directors is notable. The most revolutionary development, however, was the amendment allowing change of domicile. Lastly, in the regulatory field, the new version of the Corporate Governance Code attempted to fill in gaps that existed and incorporate new principles.

NOTE