Which are the major Cyprus laws in respect of mergers and acquisitions?
1. Companies Law Cap. 113
(a) Sections 198-201 of Companies Law regulate mergers, divisions, partial divisions, transfers of assets and exchange of shares in two or more companies intending to merge together.
(b) Sections 201A – H of Companies Law as amended by Law 70(I) of 2003 regulate mergers of public companies in line with European practices.
(c) Sections 201I – X of Companies Law as amended by Law 186(I) of 2007 harmonized national law with EU Directive 2005/56 on cross border mergers of limited liability companies opening route for cross-border mergers between companies incorporated in Cyprus and companies in the EU.
2. Law Relating to Control of Concentrations between Enterprises, No. 22(I)/1999 as amended by Law 107(I) of 1999 which incorporates the well-known EU policy to promote competition and fight monopolization.
3. Law Relating to the Maintenance and Safeguarding of Employees’ Rights in the event of Transfers of Undertakings, Facilities or Parts of Business or Facilities No. 104(I)/2000 which incorporates the European Directives 82/891 EEC and 77/187 EEC that safeguard the employees’ rights in the event of transfers of undertakings, businesses or parts of businesses.
What is the scope of each Law referred to above?
Section 198 of Companies Law regulates compromises between the majority of a company’s creditors which may then be imposed on all its creditors, and enables class rights of company members to be varied where no provision otherwise exists to vary them. It should be noted that such a scheme cannot be sanctioned by court if it is ultra vires to the company or contrary to Cyprus law. This section governs schemes of both a going concern and a company in the process of liquidation. A “compromise” presupposes the existence of a dispute, whereas the meaning of an “arrangement” is not to be limited to a compromise.
Section 200 of Companies Law provides for the reconstruction of any company or companies or the amalgamation of any two or more companies and how this can be sanctioned and approved by Court. Finally, section 201 of the Companies Law provides for the transferee company to acquire the shares of shareholders dissenting from the scheme or contract of reconstruction that has been approved by the majority.
Sections 201A – H of the Companies Law govern a merger by absorption of one or more public companies by another public company, the merging of public companies by creating a new company and the division of public companies.
Section 201I – X of Companies Law, incorporates EU Directive 2005/56/EC into national law and regulate cross – border mergers, that is cross border merger of companies which have been incorporated in accordance to the laws of a member state and have their registered office within the EC under the condition that at least two of these companies are governed by the law of different member states. More specifically it regulates the following mergers:
(a) a merger by acquisition of one or more companies by another company that takes place either (i) where one or more limited liability companies are wound up without going into liquidation and transfer to an existing company all their assets and liabilities in exchange for the issue of shares in the acquiring company to the shareholders and a settlement amount in cash payment not exceeding 10 % of the nominal value and where they have
no nominal value , of their accounting par value (ii) where a limited liability company is wound up without going into liquidation and transfers all of its assets and liabilities to a liability company which is the holder of all the shares or securities representing its share capital and (b) a merger by the formation of a new company whereby two or more limited liability companies are wound up without going into liquidation and transfer to new a company that they set up, all their assets and liabilities in exchange for the issue to their shareholders of shares in the new company and a settlement amount in cash payment, if any, not exceeding 10% of the nominal value of the shares so issued or, where they have no nominal value, of their accounting par value. Under the Companies Law, a cross border merger may only take place between companies for which merger is permitted in accordance to the provisions of the national law of the member state in which they are incorporated. The scope of the Control of Concentration Law is to concentrations that are considered to be of major importance and that is when the aggregate turnover of the business of at least two of the participating enterprises exceeds the 2 million Cypriot pounds (€3.417.203) and the commercial activities of at least of one of the participating enterprises of the concentration in question must be within the Republic of Cyprus and the aggregate turnover of the business of all the participating enterprises regarding the supply of goods or services within the Republic of Cyprus must be at least 2 million Cypriot pounds (€3.417.203) jointly. The Law Relating to the Maintenance and Safeguarding of Employees’ Rights in the event of Transfers of Undertakings, Facilities or Parts of Business or Facilities N.104(I)/2000 governs transfers of businesses or parts of these businesses to a new employer as a result of the legal transfer or merger.
How does each Law operate?
The Companies Law
A compromise or arrangement between a company and its creditors or any class of them pursuant to section 198 of Companies Law must be approved by ¾ in value of the creditors and sanctioned by Court, to be binding on all creditors, the company or even the liquidator as the case may be. When summoning the creditors to approve the scheme, they should receive a statement explaining the effect of the compromise or arrangement and in particular stating any material interests of the directors of the company and the effect of such compromise. A scheme for the reconstruction and amalgamation of a company pursuant to section 200 of Companies Law also needs to be approved by Court. The Court in approving such a reconstruction may make provision for whole or part of the undertaking and of the property or liabilities of any company concerned in the scheme to be transferred to another company. The Court may also make provision about the allotment or appropriation of shares, debentures, policies and other like interests by the transferee company to any person, the continuation by or against the transferee company of any legal proceedings pending against or by the transferor as well as such incidental, the dissolution, without winding up, of any transferor company as well as consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be effectively and fully carried out.
To give effect to the reconstruction, a scheme is set out by the auditors of the companies who are also responsible for the scheme’s approval by the Income Tax Authorities which in turn need to confirm that there will be no tax complications with the proposed reorganization. The board of directors of each of the related company should pass a resolution setting out the reorganization plan as prepared by the auditors. Each of the companies involved in the reorganization should then apply to the court by summons, requesting the court to convene meetings of the parties concerned.
(a) The court by an order will give directions as to the way the meetings will be convened.
(b) Thereafter, a notice for the meeting should be sent to the shareholders and/or creditors together with a statement which explains the effect of the scheme, and stating any material interests of directors.
(c) The general meeting of the shareholders is then held and a majority representing 3/4 in value of those of shareholders present and voting in general meeting is needed to pass such resolution.
(d) Once the general meeting approves the scheme, a petition is presented to court for final approval of the scheme. In practice, the Court may exempt the companies from convening such meetings if proof is shown that the reorganization is unanimously approved.
(e) Upon its approval by the court, the scheme is binding on the company and on all parties concerned.
To have binding force, such an order must be delivered to the Registrar of Companies for registration within 7 days. The procedure for mergers of public companies is the same as described above, although as per sections 201 A – H of Companies Law also require the directors of the participating companies to prepare a merger plan which should include the name, form and 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 privileges that are provided to the experts;
If the absorbing company already possesses less than 90% of the shares of the absorbed company, this plan should be accompanied by a detailed written report by the directors, which explains and justifies the plan financially, and this plan should be examined by independent experts appointed by the court. The company should also provide sufficient protection to its creditors.
The procedure to be followed in respect to cross – border mergers is as follows:
(a) The directors must draft and approve the proposed terms of the merger, be filed with the Registrar of Companies and be published one month before a general meeting is called.
(b) Then, a general meeting will be called where the members of the Company are called to approve the merger plan.
(c) Once approved, the next step is that the company must obtain a Court Certificate via a court application stating that the pre-merger acts and formalities have taken place and are satisfied (“1st Court Order”).
(d) A similar pre-merger certificate must be obtained by each merging non-Cypriot company in its own jurisdiction;
(e) Within 6 months of the issue of the 1st Court Order, a second Court Certificate must be obtained by which the Court will approve the legality of the completion of the merger and if the methods of participation of the employees in relation to each merging Cyprus Company have been followed in accordance to s.201W of Companies Law and in accordance to national legislation for every merging non-Cypriot company, and set a date on which the Cross-Border Merger shall be deemed to take effect (“2nd Court Order”).
Every merging Cyprus company must deliver an official copy of the 2nd Court Order to the Registrar of Companies in Cyprus for registration and publication and the Registrar shall then remove any Cyprus companies which have been absorbed in the merger from the Register of Companies and shall refer to the date of the commencement of the cross border merger.
The Concentration of Business Law
The procedure to be followed when a concentration is classified as of major importance and therefore falling in the ambit of the Concentration of Businesses Law is for a notification of the proposed concentration to be filed with the Commission for the Protection of Competition (‘the CPC’). The CPC evaluates the concentration in question and decides if it is harmful to the competitiveness of the Cyprus market or whether it or if it dominates the market. The notification must be filed within one week from the date of the conclusion of the agreement for concentration or the publication of the relevant purchase or exchange or the acquisition of the securities which ensures the control of the business. The notification includes detailed account of the companies’ shares in the Cyprus market, a detailed account of the concentration and argument as to why the concentration is in conformity with healthy competition principles.
Once the notification is filed, and it is determined that the concentration falls within the Law, a notice is publicized in the Official Gazette. Then, the Competition and Consumer Protection Service submits a report to the CPC as to whether the concentration in question is creating a dominant position in the Cyprus market. The CPC ought to reach its decision and to notify the participating parties of it within one month of the date of filing of the notification or the date of the filing of the additional missing documents. In case the CPC decides that the concentration in question is dominating the market, then a full investigation is undertaken.
The Maintenance of Employees’ Rights Law
The Law Relating to the Maintenance and Safeguarding of Employees’ Rights obliges the companies involved in a merger, that is the old and new employer companies, to inform the employees that are affected by the merger of the date of the merger, the reasons for merging, the legal and social consequences of such merger and the measures to be taken with respect to the employees. The Law provides for the rights of the employees to be protected and maintained by the new employer.
Which are the advantages and or disadvantages of the merger legislation, includingany tax benefits?
Profits from the transfer of assets by reason of reorganization do not trigger tax implications to the transferring company. Furthermore, reorganizations fall outside the scope of VAT and there is a stamp duty exemption on agreements concluded for reorganization purposes. Lastly there is a capital gains tax exemption on profits deriving from the transfer of immovable assets in the course of reorganization as well as a transfer fees exemption on the transfer of immovable assets and mortgage fees exemption when transferring mortgaged property from a company to another in the course of reorganization.
The effectiveness of a merger from a tax prospective, however, depends upon the drafting of a reorganization plan and the issuance of a reorganization certificate by the Inland Revenue.
Considering that the above tax exemptions also apply to cross – border mergers, the advantages of having the merger directive in conformity with domestic legislation in Cyprus allows many organizations to reorganize their existing corporate and tax strategies. As to the Concentration of Business legislation with respect to competition the thresholds in place that trigger notification are too wide in scope, forcing many parties to notify a transaction to the CPC that has absolutely no competition effect in Cyprus whatsoever.
As a result, companies that have no real connection with Cyprus want to proceed with a planned concentration but first need the approval of the CPC that is often burdened by notification reviews irrelevant to the Cyprus market and take up time that would be better spent on considering concentrations that raise genuine market concerns.