The purpose of registering a company with more than one member is to combine financial resources, experience and business skills in pursuit of profit maximization for the benefit of each person investing in the company. The company is a separate legal entity, autonomous and independent of its members, shareholders, directors and secretary. The persons entrusted with the management of the society exercise control and authority over its affairs and have a duty and obligation to act in good faith in the interests of the society as a whole. They are not allowed to act or make decisions whose purpose is to gain personal advantage to the detriment of the rest of society and especially a minority, even if they control the majority of votes.
It goes without saying that in every company decisions are made at general meetings, and the minority must respect and implement them. However, when the actions of a majority of members violate the legitimate rights and interests of a minority, the latter has the right to seek protection and remedies in court. The Companies Act gives minority members the right to seek any of the following remedies from the court:
(a) a ruling to end overwhelming majority action and regulate the procedure by which decisions will be made in the future;
(b) issuing an order to buy back shares of minority members from other members or the company;
(c) issuing an order to dissolve the company on the grounds that it is right and proper to do so.
The uninterrupted operation of the company requires compliance with the provisions of the charter and fair treatment of its participants. When the majority dominates the procedure of general meetings, violating the rights of the minority and advancing their own interests as the majority of members, it ignores the three basic legitimate expectations of the minority:
(a) making a profit on your investment;
(b) a significant role and participation in the management of the company;
(c) pro rata share of profits.
The purpose of this behavior of the majority is to isolate the minority, expel it from society and minimize its interest in participating in the management of society’s affairs. Such methods include refusing to pay dividends, spending company profits on disproportionate salaries and bonuses for directors, firing directors or employees of the company, hiding information from the minority, falsifying the books, and, in effect, depriving the minority of the ability to elect an active representative on the board of directors. Under the aforementioned circumstances, the ransom remedy is seen by the courts as the most common exit option for members of the minority. This view is based on equity and is consistent with the remedies provided by law. However, a buyout order is only valid if the price is fair. The term “fair price” has been interpreted by the courts to mean that the disadvantaged minority member is entitled to the market value of his shares.
In the decision of the Supreme Court of 01/19/2022, the Court indicated that the articles of the Companies Law do not extend the right of a minority shareholder to seek the buyout of his shares by third parties who are not shareholders of the company. The court upheld the decision of the trial court that the applicant must specify the exact remedies he seeks and that otherwise the procedure is incorrect, including an order to buy out a minority shareholder from a person who is not a shareholder of the company.
George Koukunis is a lawyer practicing in Larnaca and founder of GEORGE COUCOUNIS LLC, Advocates & Legal Consultants