31 Jan Suppression of minority rights
Suppression of minority rights
by George Coucounis
“The remedy of buying-out is the most common way out of a business”
THE purpose of the registration of a company with more than one member is to join financial resources, experience and business skills in pursue of the maximization of profit in favour of every person investing capital in the company. The company is a separate legal entity being autonomous and independent from its members, shareholders, directors and secretary. The persons entrusted with the management of the company exercise control and power over its affairs and they have the obligation and duty to operate in good faith in favour of the company as a whole. They are not allowed to act or take decisions, the purpose of which is to obtain personal benefits to the detriment of the rest of the company’s members and especially the minority, even if they control the majority of the votes. On the other hand, in the course of exercising their rights, the minority should avoid acting in bad faith against the majority but also abstain from creating problems or frustrating the smooth operation of the company.
It goes without saying that in every company, decisions are taken in general meetings either by the positive vote of more than 50% of the members or through special resolutions that require a positive vote of more than 75% of the members, the minority has to respect and follow the decisions of the general meeting. However, when the majority of the members act in a manner that violates the legal rights and interests of the minority, the latter has the right to seek protection and remedies from the Court. Hence, the members of the minority whose rights are suppressed do enjoy the benefit of the protection of the law. The Companies Law, Cap.113, deals with this issue in article 202 and 211 (f) giving the right to the members of the minority to claim either of the following remedies from the Court: (a) to issue an order terminating the suppressive acts of the majority and to regulate the procedure according to which decisions will be taken in the future, (b) to order the buy-out of the minority members’ shares from other members or the company, and (c) to issue an order for the dissolution of the company on the basis that it is right and just to do so.
The smooth operation of a company requires compliance with the provisions of the articles of association and the fair treatment of its members in relation to their rights as shareholders. When the majority dominates the procedure in general meetings violating the minority’s rights and promoting their own interest as the majority of members, they disregard three basic lawful expectations of the minority: (a) obtaining profit from their investment, (b) having significant role and participation in the management of the company and (c) a proportional share in the profits. The purpose of the aforementioned behaviour by the majority is to isolate the minority, expel them from the company and minimise their interest in participating in the management of the company’s affairs. Such techniques include the refusal to provide dividends, spending the company’s profits on disproportionately large salaries and bonuses for the directors, the dismissal of directors or employees of the company, withholding information from the minority, cooking of the books and essentially depriving the minority from electing an active representative in the board of directors. The purpose of the aforementioned techniques is to: (a) force the members of the minority to sell their shares at an undervalue price and (b) deprive them from a fair share in the company’s profits.
Under the aforementioned circumstances, the buy-out remedy is considered by the Courts to be the most common exit option for members of the minority participating in a company which is under the dominant control of the majority. This view is based on the law of equity and is consistent with the remedies provided by the law. However, a buy-out order is effective only if the price is fair. The term “fair price” has been interpreted by the Courts to mean that a suppressed member of the minority is entitled to the market value of their shares. Therefore, the minority is protected and suppressive or illegal behaviour by the majority should not be tolerated.
In a judgement issued by the Supreme Court on 19.1.2022, the Court, referring to the provisions of article 202, indicated that this article does not extend the right of a minority shareholder to seek the buying-out of his shares by third parties who are not shareholders of the company. The Court upheld the judgment at first instance that the applicant in an application based on article 202 has an obligation to specify exactly the remedy he seeks and that otherwise the procedure is wrong, including the order of buying-out a minority shareholder from a non-shareholder of a company.