Guide to Takeovers and Mergers in Cyprus Legal by alicejenny


									The article first appeared in "The Practitioner’s Guide to Takeovers and Mergers in
the EU" published by " City & Financial Publishing Ltd". It is reproduced by the kind
permission of the publishers

Chapter 5
Elias Neocleous, Partner
Kyriacos Georgiades, Partner
Thomas Ratel, Legal Consultant
Andreas Neocleous & Co.

5.1 Introduction
Takeovers and mergers are a comparatively new development in the commercial
life of Cyprus. However, the enactment of the Cypriot Securities and Stock
Exchange Law in 1993 and its various amendments, the passing of regulations
under it in 1995 and 1997, the inauguration of the official Cyprus Stock Exchange
in 1996, the introduction of the Cyprus Securities and Exchange Commission in
2001, the Financial Services Law of 2002 and the amendments to the Companies
Law with respect to mergers have all heralded a new era in the Cypriot securi-
ties industry and the associated activity of acquisitions generally.
On May 2004, Cyprus joined the European Union (“EU”) and, while the economic
and cultural gaps between Cyprus and the EU were smaller than those of the
other acceding states, many changes in the financial structure were required. This
process is currently very much under way in order for Cyprus to fully harmonise
its laws and practices with the acquis communautaire (i.e., the body of EU law).
For the benefit and protection of shareholders and creditors and in the interests
of good corporate governance, a Code of Corporate Conduct and a Takeover
Panel have been needed for a long time to control the detailed procedures
involved in takeovers and mergers. These additions would also improve the
standing of Cyprus as a reputable and reliable business centre. The introduction
of the Capital Markets Commission was a step in the right direction.
Although there are currently some 200 public companies whose securities are
listed on the Cyprus Stock Exchange, there are numerous important private
companies whose activities should not be underestimated and which may be the
target of local or foreign bids, leading to concentrations as in other European
markets, which is considered to be a problem. In recent years the EU, influenced
by the US policy on this matter, has been waging war against monopolisation.
This is very important, since mergers have always been considered to be
connected to monopolisation. Nowadays, monopolisation is regarded as one of
the main problems that the EU needs to tackle. Cyprus, because of its small size,
unique market structure and financial history, has based its economy, infra-
structure and public services on monopolisation. The Cyprus Electricity
Authority, CYTA (Telecommunications Authority) and Cyprus Airways are a
few examples. As a member of the European Union, Cyprus is obliged to
122                        A Practitioner’s Guide to Takeovers and Mergers in the EU

demonopolise public utility services and this is already evident on the island as
private companies start to penetrate these areas.

5.2     Acquisition targets
5.2.1   Cypriot companies and the law
The primary statute governing the company as a separate legal entity is the
Companies Law, Chapter 113 of the Laws of Cyprus (“the Companies Law”).
Under it, apart from companies limited by guarantee (most of which are non-
profit making organisations), companies limited by shares may be classified as
private, public or exempt. Nevertheless, for the purposes of harmonisation with
the relevant EU Directives, new provisions were introduced into the Companies
Law through various amendments enacted during 2003. Law 70(I) of 2003 intro-
duces Sections 201 A–H, which adopt in their entirety the following relevant EU
(a)     77/91/EEC on the formation of public limited liability companies and the
        maintenance and alteration of their capital;
(b)     78/855/EEC on the merger of public limited liability companies;
(c)     82/891/EEC on the division of public limited liability companies;
(d)     89/666/EEC on the disclosure requirements in respect of branches opened
        in Member States by certain types of company governed by the law of
        another state;
(e)     68/151/EEC on the coordination of guarantees; and
(f)     89/667/EEC on single-member private limited liability companies.
Moreover, this Law defines the merger and division procedures in Cyprus and
is therefore rightfully considered to be a major development in the area of
mergers and takeovers. Another modifying law is 167(I) of 2003 which amended
the auditing and reporting requirements of companies incorporated in Cyprus.
It is clear that more amendments will follow. Private companies
A private company is a company which by its articles of association specifically:
(a)     restricts the right to transfer its shares;
(b)     limits the number of its members to 50, excluding persons who are
        employed by the company and persons who, having been employed by
        the company, were (while in that employment and after its determination
        have continued to be) members of the company;
(c)     prohibits any invitation to the public to subscribe for its shares or
(d)     prohibits the issue of bearer shares.
Under an amendment to the Companies Law enacted in 2000, it is now possible
for a private company to have only one shareholder. Public companies
A public company is a company which does not qualify as a private company
and to which the following provisions also apply:
Cyprus                                                                           123

(a)     it must have at least seven members;
(b)     it must have at least two directors;
(c)     if directors are appointed by the articles of association, their consent must
        be filed on incorporation;
(d)     it must obtain a trading certificate from the Registrar of Companies before
        it commences business. To obtain such a certificate, and before it issues any
        of its shares or debentures to the public, the company must issue a prospec-
        tus or a statement in lieu of prospectus;
(e)     it must have a statutory meeting and its directors must make a statutory
        report to its members;
(f)     it alone has the power to issue share warrants. Exempt companies
An exempt company must fulfil all the requirements of a private company, as
well as the following conditions:
(a)     no corporate body holds any of its shares or debentures unless it is itself
        an exempt private company registered in Cyprus;
(b)     the number of debenture holders does not exceed 50;
(c)     no corporate body is a director of the company;
(d)     nobody other than the holder has any interest in any of its shares or
(e)     neither the company nor its directors are privy to any agreement whereby
        the policy of the company is determined by persons other than its share-
        holders and directors.
As its name implies, an exempt company is not subject to certain provisions of
the Companies Law, as follows:
(a)     it need not file financial statements with the annual return which it submits
        to the Registrar of Companies;
(b)     its auditors need not be qualified under Section 155 of the Companies Law;
(c)     it need not print special resolutions to be filed with the Registrar of
(d)     it may give loans and guarantees to its directors.

5.2.2   Taxation
Following the entry of Cyprus into the EU, there was a major overhaul of the
Cypriot taxation system so that it could be brought into line with EU law.
In particular, the Income Tax Law which came into force on 1 January 2003 (“the
Law”) has brought about some major changes to the Cypriot tax system as it
affects companies.
Any distinction between local companies and international business companies
(“IBCs”) has been abolished. From 1 January 2003 there is:
(a)     a single corporate tax rate of 10 per cent for all companies registered in
(b)     no geographical limitation on the exercise of any company’s activities. Its
        income may be derived from any source including a Cypriot-based source;
(c)     no restriction on the ownership of a company’s shares.
124                        A Practitioner’s Guide to Takeovers and Mergers in the EU

Active IBCs may retain the 4.25 per cent tax rate until 2005 provided that they
qualify under the transitional provisions allowed by the EU. Cypriot tax residence
Under the new system, the taxation of company profits is based on the income
of a company whose management and control is exercised in Cyprus. In other
words, the old remittance-based concept has been changed to a system of
taxation of worldwide income for residents of Cyprus and of Cypriot-sourced
income for non-residents. With respect to the residence rules for companies, the
Law adopts management and control as the key test. Registration in Cyprus
alone will not be sufficient to subject companies to tax in Cyprus. The Law does
not contain a definition of management and control but in general, to ensure that
a company satisfies the residence test, its decision-making processes should take
place in Cyprus as far as possible.
It should be noted that the Law has introduced general anti-avoidance clauses
and there is a growing attitude of the Cypriot tax authorities to screen and assess
commercial transactions to ensure that there will be no abuse of tax laws and
regulations. This is a point of much relevance to the issue as to whether the
management and control of a company is exercised in Cyprus.
It is vital that all key management and commercial decisions that are necessary
for the conduct of a company’s business are actually made in Cyprus. To that
end, the majority of the board meetings should be held in Cyprus and the
directors must be adequately informed about the matters on which they are
making decisions. Resident companies
The taxable income of companies, whether incorporated in Cyprus or not, which
have their management and control exercised in Cyprus, is liable to corporation
tax at the rate of 10 per cent, irrespective of whether the shareholders are residents
of Cyprus or not. Corporation tax is charged on the following types of income:
(a)   business profits;
(b)   interest;
(c)   rents from immovable property;
(d)   royalties;
(e)   profit from the sale of goodwill.
The profits of a resident Cypriot company, which are derived directly or indi-
rectly from a permanent establishment outside Cyprus, are exempt from Cypriot
tax. However, this exemption is not granted if the Controlled Foreign Company
(“CFC”) provision applies, namely if:
(a)   more than 50 per cent of the paying permanent establishment’s activities
      results in investment income; and
(b)   the foreign tax is significantly lower than the tax payable in Cyprus. Holding structure
A Cypriot holding company is generally set up as an ordinary company resident
in Cyprus which, besides participating in domestic and/or foreign companies,
Cyprus                                                                           125

may also have other functions such as trading, manufacturing or financing.
There are no restrictions on its activities. It is taxable in Cyprus on its worldwide
income, provided that it is managed and controlled in Cyprus.

Dividend income
From 1 January 2003, dividends are not subject to Cypriot income tax generally,
but 15 per cent special defence contribution tax is levied on the dividend income
of a Cypriot resident person (company or individual) subject to the following
(a)   Exemption for dividends payable abroad: non-residents of Cyprus are not
      subject to special defence contribution tax, and therefore dividends
      payable by a Cypriot-resident company to its foreign shareholder
      (company or individual) do not attract any withholding taxes in Cyprus.
(b)   Exemption for intercompany dividends: dividends payable by a Cypriot-
      resident subsidiary to its Cypriot-resident parent are exempt from taxation
      and are not included in the taxable income of the recipient company,
      although deemed distribution will apply.
(c)   Exemption for dividends receivable from non-resident companies:
      dividends payable by non-resident companies to resident companies are
      exempt from special defence contribution tax provided that the Cypriot-
      resident company receiving them owns at least 1 per cent of the company
      paying them (under the transposition of the EU Parent/Subsidiary
      Directive, which applies to all non-resident subsidiaries not only EU
      subsidiaries). The above exemption does not apply, however, if the CFC
      provisions are triggered.

Controlled Foreign Company legislation
Compared with many other jurisdictions, Cyprus’ CFC legislation is rather
limited, targeting only certain types of income that is not derived from real
business activities to create a distinction between participation (active income) and
investment (passive income). The CFC provisions will only be triggered if more
than 50 per cent of the non-resident company’s activities result directly or indi-
rectly in investment income, and the foreign tax burden on the income of the non-
resident company paying the dividend is substantially lower than the tax burden
of the company which is receiving the dividend and is tax-resident in Cyprus.

Capital gains tax
Any profits from the disposal of securities (shares, bonds, debentures, founder’s
shares and other company securities) are exempt from taxation under the Law
and the Capital Gains Tax Law. Gains from the sale of shares of companies
owning immovable property in Cyprus will continue to be subject to capital
gains tax.
Many of the Cypriot double taxation treaties provide for taxation of capital gains
only in the country of residence of the person (company or individual) disposing
of a capital asset. The above-mentioned provision could therefore lead to double
non-taxation, as a capital gain made by a Cypriot-resident company from a sale
of its foreign subsidiary’s shares will be exempt from taxation both in Cyprus
and in the country where the subsidiary (i.e., the capital asset) is located.
126                        A Practitioner’s Guide to Takeovers and Mergers in the EU

Group relief
Companies which are members of a group may help each other to set off losses
against profits. A company will be considered as a member of a group only if 75
per cent or more of its ordinary share capital with voting rights is owned directly
or indirectly by the other company and the other company is entitled to 75 per
cent or more of any profits available for distribution to the equity shareholders
and of any assets of the subsidiary company which would be available for distri-
bution to its equity holders on a winding up. A company will also be considered
as a member of a group if, together with others, it constitutes a 75 per cent
subsidiary of another company.
In practice, the losses of a company which is a member of a group in a specific
fiscal year will be set off against the profits of the other companies which are
members of the same group in the same year. However, the group relief set out
above can only be used where all member companies are residents of Cyprus. Finance structure
Cypriot tax legislation does not contain any thin capitalisation rules, i.e., a debt
to equity ratio requirement. However, there are certain indirect debt to equity
Under the Law, any interest paid in the course of a company’s normal trading
activities is an allowable deduction, including any amount in relation to the
acquisition of assets used in the business.
However, if a Cypriot company that pays interest makes advances at a zero rate
of interest or at a rate lower than the one paid to related parties, interest equal
to 9 per cent per annum on those advances, or the difference between the actual
interest paid and received, will have to be added back, because such advances
are not considered as expenses incurred for the purpose of the production of
Cypriot holding companies are liable to 10 per cent special defence contribution
tax on interest income from any source, whether from Cyprus or abroad. The
deduction is made at source if received from Cyprus, otherwise by assessment
on the basis of returns.
However, special defence contribution tax does not apply to interest earned by
a company in the ordinary course of its business or to interest closely related to
that ordinary carrying on of the business, both of which are subject to income
tax with no exemption available.
Any interest received by a Cypriot holding company which is deemed not to be
from or closely related to its ordinary business activities will be subject to 10 per
cent income tax on 50 per cent of the interest received and to 10 per cent special
defence contribution tax at 10 per cent on the whole amount of the interest
received, thus giving an effective total tax burden of 15 per cent.
According to Income Tax Office Circular 003-8, interest earned in the ordinary
course of business includes banking and finance, hire purchase and leasing.
Interest closely related to the ordinary course of business includes:
Cyprus                                                                        127

(a)   interest received from trade debtors by companies engaged in the trading
      and/or development of land, and by traders of new or old cars or of any
      other vehicles or machines;
(b)   interest earned by insurance companies;
(c)   interest earned by banks on current accounts;
(d)   interest earned by a company acting as a vehicle to finance other group
Interest earned from loans by a company to third parties and interest from
savings and deposits are taxed under the special defence contribution
provisions, unless these fall within one of the above categories. Royalty structure
The gross amount of any royalties derived from Cyprus is subject to income tax
at 10 per cent. In cases where an intellectual or industrial property right is
granted for use outside Cyprus, the royalty will not be deemed to be income
derived from sources in Cyprus and will therefore be tax exempt. Accordingly
Cypriot companies can continue to be used advantageously as intermediary
licensing vehicles for the routing of royalties out of countries with which Cyprus
has concluded double taxation treaties.
Royalties paid in connection with the exploitation of any intellectual or indus-
trial property right effectively connected with a permanent establishment in
Cyprus will be considered as derived from Cypriot-based sources and will
therefore be taxed in Cyprus. New reorganisation rules
The new tax rules for the reorganisation of companies follow the EU Merger
Directives Rules. Part V of the Law extends these Rules to domestic reorganisa-
tions, to all cross-border reorganisations between member and non-member
countries and to reorganisations abroad with tax implications in Cyprus. The
types of reorganisation covered are mergers, divisions, transfers of assets and
exchanges of shares. All these reorganisations do not lead to recognition of
income at company and shareholder level and therefore any profits or gains
made as a result of reorganisation fall outside the ambit of the Cypriot tax net.
Book values have to be carried forward and losses are transferred to the
absorbing company. Reorganisations are exempt from VAT, capital gains tax and
stamp duty. Double taxation relief
Section 34 of the Law provides for relief from double taxation in relation to
income tax and any tax of a similar character that is imposed by the laws of
another country. The Law distinguishes between the situation where there is a
double taxation treaty in force between Cyprus and another country and the
situation where there is no such treaty.
Section 35 of the Law applies where, under a treaty having effect under Section
34, tax payable in respect of any income in the treaty country is to be allowed as
a credit against tax payable in Cyprus in respect of that income. The tax charge
will be reduced by the amount of the credit. The Special Contribution for the
128                         A Practitioner’s Guide to Takeovers and Mergers in the EU

Defence of the Republic Law (which, as mentioned above, imposes the payment
of a special defence contribution on dividends, interest and rents) specifically
states that the provisions of the Law relating to the application of double taxation
treaties and the granting of credits will also apply to any tax or contribution
payable under this law.
Under Section 36 of the Law, where income tax has been paid on income derived
from a foreign country with which a double taxation treaty is not in force, and
such income is subject to income tax under the Law, relief from tax payable under
the Law will be granted in respect of such income, not exceeding the amount of
tax paid in the foreign country in respect of such income, namely unilateral relief.
Such relief is also granted in cases where the special defence contribution is

5.3      Arrangements, amalgamations and takeover bids
The Companies Law provides distinct means by which the capital structure of
a company may be reorganised – one in Section 198 and the other in Section 270.
In addition, Section 201 provides the means whereby the shares of a minority of
shareholders dissenting from a scheme or contract approved by the majority may
be acquired. Finally, the above-mentioned new Section 201 A–H sets out in detail
the merger and division procedure in Cyprus.

5.3.1   Arrangements under Section 198
This Section provides a method whereby a compromise or arrangement may be
made between a company and either:
(a)     its creditors or any class of them; or
(b)     its members or any class of them; or
(c)     any combination of the above.
A scheme under this Section requires the sanction of the court. It is applicable
to both a going concern and a company in the process of winding up.
A “compromise” presupposes the existence of a dispute, whereas the meaning of
an “arrangement” is not to be limited to something analogous to a compromise.
The usefulness of the Section may be seen principally in two instances. First, it
enables a company to agree a compromise with a majority of its creditors which
may then be imposed on all its creditors. Secondly, it enables class rights to be
varied where no provision otherwise exists to vary them, for example where
such rights are contained in a memorandum of association which provides no
procedure for their alteration.
The Section offers no assistance where the compromise or arrangement may be
ultra vires the company. Clearly, a scheme cannot be sanctioned where it may
usurp Cypriot law or be contrary to it, for example to convert issued ordinary
shares into preference shares.
As indicated above, a scheme under Section 198 must be sanctioned by a court.
Application to the court is made by summons providing the information set out
Cyprus                                                                           129

in Section 199 of the Companies Law. In deciding whether to exercise its juris-
diction and sanction a scheme, the court will normally need to be satisfied on
three matters, as follows:
(a)     the provisions of the statute must have been complied with;
(b)     the class must have been fairly represented;
(c)     the arrangement must be such as a man of business would reasonably

5.3.2   Mergers and divisions of public companies under Section 201 A–H
This new Section supplements Sections 198–201 with respect to company
reorganisations. Specifically it provides for:
(a)     a merger by absorption of one or more public companies by another public
(b)     the merging of private companies by creating a new company;
(c)     the division of public companies.
Furthermore, it is not an exaggeration to say that this new Section is a map of
the merger and division procedure as follows:
(a)     It is stated in these Sections that in cases of mergers the assets and the
        liabilities are transferred from the absorbed company to the absorbing
(b)     This Section specifies the steps that are necessary for mergers and
        divisions, namely:
        (i)     the directors of the participating companies need to prepare a
                merger or division reorganisation plan, which should include the
                name, the form and the registered office of the company, the
                relationship of the transfer and exchange of the shares and the total
                of the merged amount in cash, how the shares will be distributed,
                the date after which the shares provide the right of participation in
                profits, the date after which the acts of the absorbed or divided
                company are considered to have been done on behalf of the
                absorbing or the benefited company, the rights that are guaranteed
                by the absorbed or the benefiting company and all the special privi-
                leges that are provided to the experts;
        (ii)    if the absorbing company already possesses less than 90 per cent of
                the shares of the absorbed company, this plan should be accom-
                panied by a detailed written report by the directors, which explains
                and justifies the plan financially, and this plan should be examined
                by independent experts who are appointed by the court;
        (iii) the company should provide sufficient protection to its creditors.

5.3.3   Amalgamations or reconstructions under Section 270
This Section relates only to a members’ voluntary winding up. It enables a
company to be reconstructed, whereby the liquidator sells or transfers the whole
or part of the business or assets of the transferor company to a transferee
company in exchange for shares or other securities of the transferee company. In
turn, the acquired shares or securities are distributed amongst the shareholders
130                        A Practitioner’s Guide to Takeovers and Mergers in the EU

of the transferor company so that they become holders in the transferee company.
The authority conferred upon the liquidator is by special resolution of the share-
holders of the transferor company.
In effect, the assets and property of the transferor company have been absorbed
by the transferee company; an amalgamation has taken place. The same principle
applies where two or more companies are absorbed by another company incor-
porated for that purpose.
It should be noted that the transferee company need not be a company incor-
porated under the Companies Law. It may therefore be a foreign entity provided
that it is defined as a company under the law of its place of origin.
Any sale or transfer pursuant to Section 270 is binding on all the members of the
transferor company. However, members who do not vote in favour of the special
resolution may within seven days of the resolution express their dissent by
written notice addressed to the liquidator, requiring the liquidator either to
abstain from carrying the special resolution into effect or to purchase their
interests. If the liquidator proceeds with the scheme or proposes to do so, the
shares of dissenting shareholders must be purchased before the company is
dissolved. Accordingly, the liquidator will need to retain sufficient liquid
reserves to discharge payment. The value of the shares of dissentients should be
based on their value prior to the company’s reconstruction.
Creditors of the transferor company remain its creditors. It is usually part of the
amalgamation process under Section 270 for the transferee company to agree to
meet the debts due to the creditors or for the transferor company to retain
sufficient assets to satisfy them. However, statutory protection is, to a degree,
afforded to creditors, providing, inter alia, that if within a year of the passing of
the special resolution a winding up order is made by or subject to the super-
vision of the court, the special resolution will not be valid unless sanctioned by
the court.

5.3.4   Takeover bids under Section 201
In simple terms this Section enables a company, which has made what is
commonly called a takeover bid for all the shares or class of shares of a company
which has been accepted by 90 per cent or more of the holders of the target
shares, to acquire the shares of dissenting members on the same terms, unless
the latter can persuade the court not to permit such acquisition.
This compulsory acquisition of shares must follow strictly the mechanism
provided by Section 201.

5.4     Investment controls
The legal regime governing securities in Cyprus has been largely codified and
harmonised with the relevant EU Directives. The principal pieces of legislation
Cyprus                                                                         131

(a)     the Companies Law;
(b)     the Cypriot Securities and Stock Exchange Law, 14(I) of 1993 (“the CSSE
        Law”) as amended;
(c)     the Cypriot Securities and Stock Exchange Regulations of 1995, as
        amended (“the CSSE Regulations”);
(d)     various regulations passed under the CSSE Law, including the Public Bids
        for Mergers and Acquisitions of Titles of Companies listed in the Cyprus
        Stock Exchange Regulations of 1997 (“the Mergers and Acquisitions
(e)     the Possession, Use and Announcement of Privileged Confidential Infor-
        mation Law, 36(I) of 1999, which essentially prohibits insider trading;
(f)     the Cyprus Securities and Exchange Commission Law of 2001 which intro-
        duced, in Section 5, the Cyprus Securities and Exchange Commission.

5.4.1   Disclosure of substantial holdings Shareholders’ and directors’ duties
The CSSE Law, which has been considerably amended in the last few years,
imposes an obligation on substantial shareholders, and those who by acting in
concert have a substantial interest in a quoted company, to disclose their
holdings and report subsequent transactions. This applies where their holdings
have an aggregate value equal to or greater than 5 per cent of a listed company’s
securities. Furthermore, a person will be deemed to have a substantial holding
in such securities as are held by a nominee, spouse or blood relative up to the
second degree, or companies which he controls. To address the practice of “ware-
housing”, there are “concert party” provisions under which persons will be
regarded as acting in concert if there is an agreement or arrangement between
them for the acquisition by any one or more of them of interests in securities of
a particular public company. The disclosure requirement on acquisition of
substantial holdings also extends to the company’s board of directors, officers,
auditors and any provident funds.
Deliberate or intentional non-compliance is a criminal offence punishable by
imprisonment for up to two years and/or a fine of up to CYP5,000.
The Mergers and Acquisitions Regulations contain additional disclosure and
reporting requirements for substantial holdings. Companies’ duties
Under an amendment to the Companies Law enacted in 2000, a company may
usually only buy its own shares on condition that:
(a)     the purchase is authorised by a special resolution at an Annual General
        Meeting held not more than 12 months before the purchase;
(b)     the shares are not held for more than two years;
(c)     where the shares are quoted on the Cyprus Stock Exchange, the acquisi-
        tion price does not exceed by more than 5 per cent the average price of the
        shares during the last five days before the purchase.
Certain other conditions also apply. None of the conditions applies to acquisi-
tions made under a scheme of reduction of capital or under a court order for the
protection of minority shareholders.
132                        A Practitioner’s Guide to Takeovers and Mergers in the EU

The amendment, enacted so that public companies could buy back their stock
which was thought to be undervalued following the sudden slump in stock
prices on the Cyprus Stock Exchange in 2000 and 2001, has not been as effective
as was originally hoped. There are also legal gaps and uncertainties which have
made it difficult to use this legislation, but elaboration of these points goes
beyond the scope of this Guide.
A body corporate cannot be a member of a company which is its holding
company, and any allotment or transfer of shares in a company to its subsidiary
will be void. Moreover, it is illegal for a company, directly or indirectly, to give
financial assistance for the acquisition of any of its shares or any shares in its
holding company. It is therefore not possible for a company to acquire a substan-
tial holding in itself.
Under the CSSE Law, a company whose shares are listed on the Cyprus Stock
Exchange is obliged to notify the Securities Commission and the Council of the
Stock Exchange of any commercial activity that it undertakes with its manage-
ment or any other person with whom it is connected within seven days from the
time that such activity is entered into where its value exceeds CYP50, 000. This
obligation is in addition to the provisions contained in the Companies Law
relating to disclosure on the part of directors and certain other insiders, control-
ling such persons’ involvement in substantial property transactions with the
company and related companies and regulating the circumstances in which they
may receive loans and other financial facilities.
The CSSE Law also imposes an obligation on a listed company to supply the
Securities Commission and the Council of the Stock Exchange immediately and
on its own initiative with any information in its possession which may affect the
value of its listed securities. A listed company which fails to comply with the
disclosure requirements laid down in the CSSE Law may be delisted following
a reasoned decision from the Council.

5.5    Foreign investment
Foreign investment in Cyprus used to be regulated by the Central Bank of
Cyprus, which usually imposed conditions such as the following:
(a)   the enterprise must confine its activities to those for which permission is
(b)   the paid-up share capital of a company must be commensurate with its
      financial requirements;
(c)   capital introduced by non-residents must come from external funds;
(d)   interest paid on foreign loans should be at market rates;
(e)   audited financial statements must be submitted annually to the Central
The Movement of Capital Law, 115(I) of 2003, which repealed the Exchange
Control Law, has relaxed the restrictions on the movement of capital and
payments between residents of Cyprus and other EU Member States and
between residents of Cyprus and those of third countries, as well as transactions
Cyprus                                                                           133

in foreign currencies and gold within Cyprus. Subject to limited exceptions, all
such movements – including investments in immovable property, share trans-
actions, loans and movement of personal capital – may be carried out without
any restrictions.

5.5.1   Investment from EU countries Direct investment
There are no restrictions on the amount of the investment made by EU investors
in any kind of enterprise in Cyprus. Portfolio
Up to 100 per cent of the share capital of a company listed on the Cyprus Stock
Exchange may be acquired by investors from the EU. In the banking sector, the
maximum non-resident participation, whether EU or not, is 50 per cent and no
individual may own, directly or indirectly, more than 9 per cent of a bank’s share
capital without the Central Bank’s approval.

5.5.2   Investment from non-EU countries Direct investment
Important changes have been made with effect from 1 October 2004. Foreign
direct investment in Cyprus from non-EU countries has been fully liberalised,
and the minimum amounts of investment and the maximum percentages of
participation have generally been abolished, but licences may be still required
for certain investment activities. There is no difference between companies
carrying on business outside Cyprus (previously known as offshore or inter-
national business companies) and companies carrying on business inside
Cyprus. One of the practical effects of the liberalisation is that foreigners wishing
to register companies in Cyprus or buy shares in existing Cypriot companies no
longer need to seek approval from the Central Bank. Applications for such activi-
ties should be submitted directly to the Registrar of Companies and Official
Receiver. Applications for licences under the Movement of Capital Law should
be made to the Ministry of Finance. Portfolio
Up to 49 per cent of the share capital of a company listed on the Cyprus Stock
Exchange may be acquired by non-EU investors. In the banking sector, the
maximum equity participation is 50 per cent, as stated above, and no individual
may own, directly or indirectly, more than 9 per cent of a bank’s share capital
without the Central Bank’s approval.

5.5.3   Restricted investments
For nationals of both EU and non-EU countries, there are still restrictions on
acquisitions in the areas of real estate, tertiary education, public utilities, radio
and television stations, newspapers and magazines, and airlines. Each appli-
cation is considered on its merits.
134                         A Practitioner’s Guide to Takeovers and Mergers in the EU

5.5.4   Incentives
There are several incentives for locating a business in Cyprus, including:
(a)     a favourable business environment, with skilled labour at reasonable rates
        of pay and very good support facilities and services;
(b)     a virtual absence of exchange controls, allowing profits, interest and
        dividends from approved investments, capital invested and any capital
        gains from the disposal of shares in such investments to be freely remitted
(c)     the accession of Cyprus to the EU on 1 May 2004, providing a base for the
        production and export of goods to the larger EU market;
(d)     industrial estates, and the Industrial Free Zone (“IFZ”) near Larnarca close
        to the port and international airport, where industries can import their
        machinery, equipment and raw materials free of customs duty. Products
        manufactured in the IFZ may enter the Cypriot market on payment of the
        lowest preferential tariff;
(e)     bonded factories and warehouses, having the same customs status as the

5.5.5   Recent developments
The Financial Services Firms Law, 148(I) of 2002 was enacted to regulate the
licensing and supervision of financial and investment services in Cyprus, and to
harmonise Cypriot legislation with EU law by introducing the free movement
of investment services and reforming the Cyprus Stock Exchange. This Law now
regulates investment services provided by a Cypriot investment firm, a branch
of a foreign investment firm and cross-border transactions within the EU, both
on a freedom of services and a freedom of establishment basis, under the
European Passport Benefit System. These firms are under the supervision of the
recently formed Capital Markets Commission (also known as the Securities and
Exchange Commission).
Another significant recent development has been the preparation of a draft law,
amending the Invitation to the Public for Investment Law of 2002 in accordance
with the Prospectus Directive 2003/71, which has been submitted for legal
vetting. It regulates the laws in relation to the content and format of prospec-
tuses and, as such, Member States may not require disclosure provisions in
addition to those required by the Prospectus Directive. One of the major conse-
quences of the Prospectus Directive is the ability to raise capital in any of the EU
Member States with the production of a prospectus drawn and approved in one
Member State. Another important consequence is that, in replacing the Public
Offer of Securities Directive, all prospectuses are now vetted and approved by
a single competent authority. Therefore, prospectuses that did not require prior
approval under the Public Offer of Securities Directive will now be required to
be approved, unless an exemption exists. The draft law is a positive develop-
ment for Cyprus, since it significantly lowers the cost of raising capital and it
offers greater protection to investors.
Cyprus                                                                          135

In September 2004 another draft law, concerning the admission of securities, the
obligations of issuers and the information to be published in compliance with
the above-mentioned Directive 2003/71, was also submitted for legal vetting.
Directive 2004/39 on markets in financial instruments and Directive 2004/25 on
takeover bids have not yet been implemented, although they are the next in line.
As regards European companies, Council Regulation 2157/2001/EC of 8 October
2001 on the statute for a European company (“SE”) is directly applicable in
Furthermore, Council Directive 2001/86/EC of 8 October 2001 supplementing
the statute for a European company with regard to the involvement of employees
and Council Directive 94/45/EC of 22 September 1994 on the establishment of
a European Works Council or a procedure in Community-scale undertakings and
Community-scale groups of undertakings for the purposes of informing and
consulting employees, as amended, have both been implemented with the
enactment of Laws 227(I)/2004 and 68(I)/2002.
Unfortunately, and despite the direct applicability of the above-mentioned Regu-
lation and the enactment of laws, it is not possible to set up SEs in Cyprus as the
Registrar of Companies has yet to finalise the procedures and formalities which
will have to be followed in order to do so. These are currently being drafted by
the Registrar in conjunction with the Attorney General.

5.6      Merger control – general
Merger control is a relatively new area of law in Cyprus and refers to the well-
known EU policy to promote competition and fight monopolisation. The Merger
Control Law, 22(I) of 1999, as amended by Law 107(I) of 1999 (“the Law”), came
into effect in 2000. The Law is modelled on Council Regulation (EEC) 4064/89
as amended by Council Regulation (EC) 1310/97, but adapted to be in line with
existing Cypriot competition rules and procedures. Another important develop-
ment in the area of competition law (not merger control) was the adoption of the
new Anti-Monopoly Directive 1/2003, which promotes healthy competition,
since it gives an opportunity to companies to reach an agreement with the local
Competition Committee.

5.6.1   Jurisdictional thresholds
Under Section 3 of the Merger Control Law a concentration of undertakings will
be subject to the Law when:
(a)     the aggregate turnover of at least two of the undertakings exceeds CYP2
(b)     at least one of the undertakings has commercial activities within the
        Republic of Cyprus;
(c)     at least CYP2 million of the aggregate turnover of all the undertakings
        relates to the sale of goods or the offering of services within the Republic
        of Cyprus; or
136                          A Practitioner’s Guide to Takeovers and Mergers in the EU

(d)     the concentration is declared to be of major importance by the Minister of
        Commerce, Industry and Tourism under Section 8 of the Law.
The guidance provided by the Law in calculating the aggregate turnover makes
no reference to whether it is limited to Cyprus or to the aggregate worldwide
turnover. However, the threshold under Section 3(2)(a)(iii) of the Law specifi-
cally refers to an aggregate turnover of at least CYP2 million in the Republic of
Cyprus, which would seem to suggest that the aggregate turnover referred to in
Section 3(2)(a)(i) of the Law relates to the worldwide turnover of the participat-
ing undertakings. The Law does not define the term “commercial activities”
under Section 3(2)(a)(ii), but the approach adopted seems to be narrow and
By virtue of Section 3(2)(b) of the Law, taken in conjunction with Section 8, the
Minister of Commerce, Industry and Tourism has the power to bring a concen-
tration within the ambit of the Law if it is considered to be of major importance,
regardless of whether the concentration meets the criteria outlined in Section
3(2)(a). Section 36 of the Law provides some guidance as to what may amount
to “a concentration of major importance” in that it refers to concentrations which
will have an effect on economic or social development, technical progress,
employment, or the supply of goods and services necessary for public safety in
the Republic or part thereof.

5.6.2    Types of transactions
Until recently, there were no specific provisions contained in the Law for
transactions between foreign entities. However, it seems that the requirements
of the Law must be complied with where a takeover or merger involves under-
takings established outside Cyprus if and to the extent that this arrangement
creates or strengthens a dominant position in the affected market within the
Republic of Cyprus (Section 10 of the Law). Section 2 of the Law defines a
dominant position as:
        “a position of economic strength enjoyed by an undertaking which enables
        it to prevent effective competition in the relevant product or service market
        and to behave to an appreciable extent independently of its competitors and
        customers and ultimately its consumers.”
The Law was silent as to the imposition of any requirement for foreign
companies to have a physical presence in Cyprus to come within the scope of
the Law. As stated above, the criterion for deciding whether a particular concen-
tration may be given clearance or not is the extent to which this arrangement
creates or strengthens a dominant position in the affected market within the
Republic of Cyprus.

5.6.3    Mandatory nature of merger control rules
Notification of the concentration is mandatory, and the time limits are expressly
set out in the Law. Concentrations which meet the criteria mentioned above must
be notified to the Competition and Consumer Protection Service (“the Compe-
tition Authority”) not more than a week after the date of the conclusion of an
Cyprus                                                                           137

agreement, the announcement of a public bid or the acquisition of a controlling
Once a concentration has been notified and the relevant documentation filed, the
Competition Authority has one month to carry out a preliminary examination
of the compatibility of the concentration with competitive market requirements.
The period of one month may be extended by 14 days, depending on the
workload of the Competition Authority. At the end of its preliminary examina-
tion, the Competition Authority will send a reply to the Competition Committee.
This is stage one.
If the Competition Committee decides that the concentration falls within the
scope of the Law and that there are serious doubts about its compatibility with
competitive market requirements, the Competition Committee refers the case
back to the Competition Authority for full examination. This is stage two. In this
event, the Competition Authority has three months from the date of the notifi-
cation to it to report its findings to the Competition Committee. However, this
period may be extended depending on any complications that may arise in the

5.6.4   Suspension of concentrations prior to implementation
Under Section 9 of the Law, a concentration cannot be implemented until
clearance is given, or deemed to be given by virtue of the relevant authorities
failing to comply with the limits set out in the Law. In cases where the investi-
gation of the concentration proceeds to stage two, the undertakings concerned
may apply for temporary clearance. If the Competition Committee is satisfied
that the undertakings would incur serious damage from delays in implement-
ing the concentration, temporary conditional or unconditional clearance may be
granted, without prejudice to the final decision of the Competition Committee.

5.6.5   Exemptions
Apart from threshold requirements that bring the provisions of the Law into
effect, Section 4(5) of the Law provides for four specific instances where a concen-
tration is deemed not to exist:
(a)     credit, finance, insurance or other organisations with similar activities that
        are involved in the trading of shares for themselves or third parties as part
        of their activities and have acquired a company for the purpose of holding
        their shares temporarily and disposing of them within a time period of less
        than one year. To fall within this exemption, the organisation in question
        must not exercise the voting rights that these shares may have in order to
        determine any issues that may affect the acquired company’s competitive
(b)     control is exercised by a person empowered by legislative provisions
        involving the winding up or liquidation of the company in question;
(c)     the activities mentioned above are being exercised by portfolio manage-
        ment companies;
(d)     the shares have been acquired by inheritance.
138                        A Practitioner’s Guide to Takeovers and Mergers in the EU

5.6.6   Penalties for non-compliance
The Competition Authority may impose financial penalties of up to CYP50,000
for each breach of the Law, depending on the circumstances of each case, with
an additional fine of CYP5,000 for each day that the breach continues, or a fine
of up to 10 per cent of the total revenue of the concentration.

5.7     Merger control – listed companies
The Mergers and Acquisitions Regulations are based on the relevant EU Direc-
tives, harmonising Cypriot law with the acquis communautaire in this area of law.
They apply only to companies whose securities are admitted to the Cyprus Stock

5.7.1   Procedure
The Council of the Stock Exchange is vested with the duty to supervise the appli-
cation and enforceability of the Mergers and Acquisitions Regulations. These
stipulate that any legal or natural person or group of investors acquiring more
than 5 per cent of a target company’s stock should immediately notify the
Council and the target company’s board of directors and thereafter notify the
public of the acquisition of such a stake. A third party building a similar stake
in the target company is also required to notify the Cyprus Stock Exchange of
every 0.5 per cent capital acquisition in the target company.
When the 10 per cent threshold is passed, the bidder should make its intention
public and notify all concerned. If the stake is raised to 20 per cent, then another
offer should be made to all shareholders on a pro rata basis, irrespective of size.
When 30 per cent is reached, the bidder must make a public offer to acquire up
to 50 per cent of the capital of the target company. When the stake exceeds 50
per cent, the bidder must make a public offer to acquire up to 70 per cent of the
capital of the target company, and when the 70 per cent threshold is passed, the
company will cease to be a public company and will be delisted.
Subject to certain conditions, the Council of the Stock Exchange may allow those
bidding for the shares concerned to scale down their offer or withdraw from
bidding. Cases falling within this category include the premature death of the
bidder and the passing of the stake to the next in line or beneficiary of the will.
Other exceptions exist where the stake is passed to a company following liqui-
dation of the bidding company or where the stake is indirectly acquired through
a merger with another company. In the event that the 30 per cent threshold is
passed accidentally, the bidder will be given a one-year grace period, during
which time the stake should be reduced to below 30 per cent. Where the stake
is acquired as a result of an increase in the target company’s share capital and
the exercise by the bidder of his pre-emptive rights, the Council may exempt the
bidder from initiating a public offer in accordance with Regulation 24 of the
Mergers and Acquisitions Regulations.
Cyprus                                                                         139

5.7.2   Timetable
The following time frame is stipulated by the Mergers and Acquisitions
Within 10 working days of the announcement of the offeror’s decision to make
a public takeover bid, a document providing details thereof must be submitted
to the Cyprus Stock Exchange Council, the Securities Commission and the board
of directors of the target company and, once approved by the Cyprus Stock
Exchange, it must be published.
The Council is required to issue its decision on the admissibility of the public
takeover bid within three working days of its filing. The deadline for acceptance
of the relevant offer is specified by the offeror in the public bid document. This
deadline must be not earlier than 30 days and not later than 45 days from the
day on which the document was made available to the public. In the event of a
review of the bid, the stated deadline will be automatically suspended for a
Any counter offer must be made by the beginning of the seventh day before the
deadline set for acceptance of the initial public bid. Within 48 hours after the
deadline for acceptance of the offer, the results of the public bid(s) must be
announced in the Stock Exchange and published on the following day in two
national daily newspapers.
The Mergers and Acquisitions Regulations make “stock parking” and “stock
pushing” illegal and impose severe penalties on bidders who violate the relevant
provisions. In addition to heavy fines, penalties include removing the voting
rights of the bidder for three years and barring the bidder from appointing a
representative to the board of directors of the target company for five years.

5.8      Directors’ fiduciary duties
Directors owe fiduciary duties to shareholders in the course of a takeover bid
when they are advising them whether to accept or reject a bid. These clearly
include a duty to be honest and a duty not to mislead. In the case of International
Ltd v Lord Grade (sub nom Re ACC) (1983) BCLC 244 it was held that when
directors have decided that it is in the best interests of their company that it
should be taken over and when there are two or more bidders, the only duty
they owe to the company is to obtain the best price. When they must decide
between rival bidders, the interests of the company must be the interests of the
current shareholders. The directors do not owe a duty to the successful bidder.
In Morgan Crucible Co. PLC v Hill Samuel & Co. Ltd (1991) 1 All ER 148 it was
held that if during a takeover directors make representations to a bidder, they
owe a duty to the bidder not to be inaccurate or negligent.
140                         A Practitioner’s Guide to Takeovers and Mergers in the EU

5.9     Transfer of shares
5.9.1   General
The articles of association of a company normally regulate the way in which its
shares may be transferred. The Companies Law provides that, unless excluded
or modified by its articles, the regulations contained in Table A in the First
Schedule to the Companies Law will control the transfer of the shares of a
Cypriot company.
Table A does not include a right of pre-emption or a right of first refusal on a
transfer of shares but it is the normal practice for Cypriot companies to include
such rights in their articles.
Part II of Table A empowers the directors of a company, in their absolute dis-
cretion and without giving any reason, to decline to register any transfer of shares.

5.9.2   Private companies
The procedural requirements for the transfer of the shares of a private company
are governed by law and by the company’s articles of association.

5.10     Conclusion
Takeovers and mergers are becoming increasingly significant in Cyprus due to
the island’s continuing development as an international business centre and in
view of the widespread use of Cypriot companies as intermediary holding
company vehicles for the routing of investments to various countries.
It has therefore become necessary for Cypriot companies, in order to expand their
activities, to seek either loan or equity finance in established financial markets
and many of them have become takeover or merger targets of substantial western
concerns. This important international element makes it even more necessary for
Cyprus to develop, as it has failed to do so far, a sound legal structure of corporate
law in general and for takeovers and mergers in particular.
The fact that the legal system of Cyprus has a substantial common law element,
largely inherited from English law, is extremely positive and advantageous
because it enables banks and other financial institutions and foreign lawyers to
understand the Cypriot system readily.
Significant factors contributing to the attraction of Cyprus as an international
business centre are the fact that Cypriot company law is based on that of the UK,
and that corporate financial legislation is constantly being amended or replaced
as part of the Government’s drive to implement all relevant EU Directives.
However, as always, more needs to be done. In particular, the Companies Law,
despite several amendments, continues to be outdated and requires an overhaul,
and there is also a need for a comprehensive law on insolvency. Such develop-
ments, coupled with a clear policy of implementation by the regulators of all
changes in the corporate sector, will play a large part in consolidating Cyprus’
position as an international business centre in the area.

To top