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Cyprus Companies: Minority Protection and Derivative Actions

By Pamela A. Evangelou

Based on the principle in Salomon v Salomon, upon its incorporation a company acquires legal personality separate from its members and as such it is responsible for its own debts and obligations. It has the right to sue or be sued in its own name. This right is not always possible to exercise, as shall be analyzed further below. The powers of companies are exercised by its two management bodies, the general meeting of the company and its board of directors, both of which take decisions based on majority votes. These democratic procedures consequently favour the persons who control over half of the votes of the general meeting or the board of directors. Thus the members of a company belonging to the minority must, in most cases, accept the decisions taken by the majority.

Theoretically, these individuals can try if they wish to control a larger percentage of the votes, either through acquiring additional shares or through representations and arguments to other shareholders. In practice, however, this proves to be quite difficult.

A large public company usually needs large funds to secure a majority stake. In smaller private companies the majority shares are likely to be held by a single person. Theoretically the minority members could opt out of the company, however in practice the other shareholder may refuse to buy the shares or offer a reduced price for their acquisition.

In such cases it is reasonable that the law will offer some protection to the minority of the company. However, the law must maintain a delicate balance. On the one hand, it must protect minority shareholders from unfair and oppressive acts of the majority. On the other hand, it must allow the company to operate in accordance with its articles of association, without external interventions that may interrupt its otherwise proper operation.

The rule in Foss v Harbottle:

Company membership rights are rights which each member has agreed to subject to the will of the majority, provided that this will is expressed in accordance with the law and the company’s articles of association. In relation to these rights, the principle of sovereignty of the majority is applied, otherwise known as the general rule in Foss v. Harbottle.

The specific implications of this rule and the classical wording set out in Edwards v. Halliwell:

(a) The appropriate plaintiff in a lawsuit in relation to an alleged tort against a company is, at first sight, the company itself.

(b) Where the alleged tort is a transaction which could be binding on the company and all its members by a simple majority of the members, no member alone may be sued in connection with that matter because, if the majority ratify the transaction then the company has not been wronged.

(c) On the other hand, if the majority disputes the transaction, there is no good reason for the company not to sue.

One reason for this rule is to avoid multiple procedures. If a shareholder is allowed to personally sue on a matter that essentially concerns the company, then lawsuits could be filed on behalf of each of the company's shareholders.