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The peculiarities of cancelling or forfeiting issued shares of a Cyprus private company

CATEGORY: CYPRUS LEGAL SYSTEM

The peculiarities of cancelling or forfeiting issued shares of a Cyprus private company

As a general principle, it is not possible for a Cyprus company to buyback and, thus, own or to cancel its shares. Nevertheless, a public company is exceptionally permitted to own its own shares; according to sections 57A – 57D of Cap. 113, the ability of a public company to acquire its own shares is possible although such acquisition is still subject to a series of conditions set forth by the Law. However, this is not the case for a private company that is not allowed to buy and/or otherwise acquire and hold its own shares; this may only be effected, indirectly.

At first instance, a private company may be able to acquire and hold its own shares through the procedure of forfeiture of shares. Subject always to the provisions of the Articles of Association of each particular company, the mechanism of forfeiture may employed in cases the holder of one or more shares in a company fails to comply with a condition or meet an obligation under which the share or shares, as the case may be, in question, was / were issued to that person. That said, it should be stressed that the Companies Law, Cap. 113 makes no reference to the power of the company to forfeit any of its issued shares; instead, it is left open to each company to incorporate (or not) the mechanism of forfeiture as well as its particulars in its Articles of Association. In this regard, the Model Articles of Association included in Part I of Table A of the Companies Law, Cap. 113 provides for a specific mechanism, according to which the company’s Board of Directors may forfeit the share(s) of a member only in the case the said member “fails to pay any call or instalment of a call on the day appointed for payment thereof”. Given that, although, the Model Articles of Association included in Part I of Table A does not necessarily apply in all cases, the forfeiture mechanism can be interpreted in a more broad and liberal, but always reasonable, way and thus, the particulars thereof can be adjusted to the specific needs of each particular company.

In any event, however, following the exercise of forfeiture, the forfeited shares (free of any rights for the benefit of the holder for so long as these are held by the company) may be held by the company for an indefinite period of time while such forfeited shares are considered, in essence, as forming part of the unissued share capital of the company and, thus, may at any time be sold (issued), re-allotted, cancelled or otherwise disposed of at the discretion of the Company. That said, in view of the fact that forfeited shares will be treated as unissued shares, it becomes apparent that the forfeiture of shares could therefore be considered as equivalent to the cancellation of shares out of the company’s issued share capital.

That notwithstanding, depending on the circumstances of each particular case, the forfeiture of shares may not be the proper way to achieve the desired result. To be more precise, despite that the forfeiture of shares may serve the purpose of cancelling issued shares leading in their inflow to the company's unissued capital (but not the transfer thereof in the ownership of the company), this may also be effected through their direct cancellation by way of reduction of the issued share capital of a company. However, the cancellation of issued shares in that way is a bit complicated in the sense that the legitimizing basis of the cancellation must be well-justified.

More specifically, in so far as the reduction of the share capital of a company is concerned, section 64 of the Companies Law, Cap. 113, provides an indicative list of reasons on which a company could rely for the reduction of its company’s share capital:

(a)    Extinguish or reduce the liability on any of its shares in respect of share capital not paid up.

(b)   Cancel any paid-up share capital which is lost or unrepresented by available assets;

(c)    Pay off any paid-up share capital which is in excess of the wants of the company;

(d)   Cancel paid up share capital for the purpose of writing off losses of the company;

(e)   Cancel paid up share capital by the creation of a reserve, to be called “the capital reduction reserve fund” which will be subject to the same treatment as the share premium account.

In terms of the reduction of the share capital of a company, the fact that the list provided for in the Law is not exhaustive, is of particular importance, since it enables the company to make various adjustments in its share capital. Besides, both section 64 of the Companies Law, Cap. 113 (“[…] a company […] having a share capital may […] by special resolution reduce its share capital in any way […]”) and the regulation 46 of the Model Articles of Association included in Part I of Table A of the Companies Law, Cap. 113 (“the company may by way of a special resolution reduce its share capital […] in any way […]”) give the company the power to reduce its issued capital in any way. In this respect, it is worth to note that, relying on the relevant legislative provisions, the reduction of the share capital of a company is always subject to the confirmation by the Court. Therefore, in view of the fact that the competence of a Court to approve and confirm the reduction of the share capital of a company arises provided that the general meeting of the interested company has duly passed a special resolution for reducing its share capital, it follows that a company may well pass a special resolution to this end according to which its issued share capital is reduced otherwise than in accordance to the rights of the company’s members, including the ability to reduce its issued share capital by cancelling one or more shares out of its issued share capital, provided this is duly justified.

On the whole, although it seems that the mechanism of forfeiture of shares and that of cancellation of shares by way of reducing the issued share capital of a company may serve the same purposes, it is of utmost importance to underlying the key-elements underlying each of the said mechanisms, as explained above. In any event, however, it is clear that in order for a company to effect either forfeiture or reduction, its Articles of Association must specifically make a reference to the power of the company to effect the respective action. On that basis, the company through its managing body, the Board of Directors, must specifically examine the particulars of each case it appears before the same so as to assess its merits as well as the options available and powers granted pursuant to the respective company’s Articles of Association so as to be in a position to decide of the treatment of each such case.

Author: ANTRIA ARISTODEMOU

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