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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 Cyprus 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 Directives: (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. 22.214.171.124 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 debentures; (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. 126.96.36.199 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. 188.8.131.52 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 debentures; (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 Companies; (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 Cyprus; (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. 184.108.40.206 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. 220.127.116.11 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. 18.104.22.168 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 exemptions: (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. 22.214.171.124 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 restrictions. 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 income. 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 companies. 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. 126.96.36.199 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. 188.8.131.52 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. 184.108.40.206 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 payable. 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 approve. 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 company; (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 company. (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 are: 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 Regulations”); (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 220.127.116.11 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. 18.104.22.168 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 granted; (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 Bank. 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 22.214.171.124 Direct investment There are no restrictions on the amount of the investment made by EU investors in any kind of enterprise in Cyprus. 126.96.36.199 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 188.8.131.52 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. 184.108.40.206 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 overseas; (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 IFZ. 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 Cyprus. 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 million; (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 conservative. 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 interest. 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 process. 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 position; (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 Exchange. 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 Regulations. 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 week. 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.
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