Shareholding in a company

A company should preferably not be dependent on two directors with 50 per cent of its shares each

The shareholding or management structure of a company may create problems when a company depends upon only two directors who each hold 50 per cent of its shares. Any disagreement or lack of co-operation may lead to a deadlock which may disrupt the company’s activities or result in its accounts being frozen or in its dissolution.

In order to avoid such a risk, decision making, either by the board or in a general meeting, should be regulated so that majority is safeguarded. The establishment of a company by two partners with 50 per cent of the shares each or with only two directors should be avoided, since if a dispute arises, the board cannot be convened and a decision cannot be taken.

Seeking a remedy through court even with a derivative action aiming to protect a company’s rights does not seem to resolve disputes between partners. A derivative action is raised by a shareholder on behalf of the company and is based on a cause of action the company has against another shareholder or director. The existence of a third director or shareholder creating a majority, so a possible deadlock is avoided, is to the benefit of companies and their members.

The Companies’ Law, Cap.113 and especially the provisions of articles 126 and 178 may assist in finding a solution, since they give the right to convene an extraordinary general meeting of the board and remove a member where such a decision is possible. A company member who holds more shares than 10 per cent of the company’s paid capital can file an application to convene such a meeting and vote. The application must mention the purpose of the meeting, be signed by the member and be deposited at the company’s registered office. If the board members do not convene the meeting within 21 days from its deposition, the applicant, being a member, is entitled to convene it themselves, but it must take place within three months of the deposition of the application.

In such a meeting, the company may decide, through a resolution, to remove a director, despite any provisions of the articles of association or any agreement between the company and the member. However, a special notice for the resolution must be sent to the member concerned, who has the right to be heard in the meeting. A simple majority of votes is adequate for the resolution to be approved; the majority of the shareholders decide who manages the company. Article 178 gives the shareholders the right to remove a director and court cannot intervene.

When a derivative action is instituted, the company is included as a defendant, however it is the actual plaintiff. If the action succeeds and a judgment is issued against the actual defendants, the judgment is to the benefit of the company and not the shareholder filing it as a plaintiff. The company cannot be included as a plaintiff, since the filing of the action was not approved by the board or the general meeting. Such a judgment is considered a precedent, binds the company and cannot be raised again. Furthermore, the plaintiff, being a shareholder of the company, cannot raise personal claims in the derivative action. Such an action is usually raised by the minority shareholder of a company when they claim another shareholder has committed wrongdoings against it or when a deadlock is reached and the other shareholder refuses to co-operate.

Company law provides that when damage is caused to a company, the shareholder who wished to apply to the court to safeguard its rights must first try the board or a general meeting in order to take legal steps. It derives from the fact that there are risks when two shareholders in a company hold 50 per cent of the shares each, as explained above.

George Coucounis is a lawyer specialising in the Immovable Property Law, based in Larnaca. E-mail: [email protected], tel: 24818288