Share Rights in Cyprus – Share Redemption

by | Oct 23, 2019 | Cyprus Companies

A share may be issued with several share rights attached. These share rights can relate to the right to vote, the right to receive a dividend, the right to receive a return of capital and the right of redemption.

The right of redemption is slightly different than the other share rights. In a Cyprus Private Company, the right of redemption can only be included in the share rights if the shares are issued with such right of redemption attached to them.

This means that an alteration of capital, with the approval of the various members, cannot introduce the right of redemption; whereas the right to vote might be freely introduced into a specific class after the shares have been issued.

When forming a company in Cyprus it is important to consider the relationship between the shareholders and what rights they will enjoy, more on this topic can be found in my recent publication regarding share plans in Cyprus. If the commercial arrangements of the structure, the future exit strategy fits within the Cyprus company’s strategy, the board of directors may decide to issue shares that include a right of redemption. 

What is a Right of Redemption?

A right of redemption means that the Cyprus Company ‘s board of directors or the shareholders can decide to redeem (cancel) the shares in exchange for cash or a fresh issue of shares (in Greek εξαργυρώνω μετατρέπω σε μετρητά τίτλους με χρηματική αξία (π.χ. επιταγές, κλπ)).

The Cyprus Company’s Articles of Association will typically include provisions specifying the method, time frame and process to be followed for the share redemption; nevertheless, Section 57 of the Cyprus Companies law should not be neglected, since it also includes certain limitations such as the obligation to redeem only out of profits available for distribution.

If your current articles of association do not include the terms of redemption the registrar of companies will not record the issue of shares until the redemption rights are inserted in the articles of association. 

What is the Effect of Share Redemption in Cyprus?

The effect of the share redemption in Cyprus is that the shares, and by extension the rights to vote, receive dividend and capital will be eliminated, and in exchange, the shareholder can receive cash or new ordinary shares.

The tax effect for Cyprus domiciled individuals is the same however if the shareholder is based outside of Cyprus the tax treatment of the funds might change since local rules classify it as a return of capital. Furthermore, because the redemption process allows for the specification of a premium this means that a larger value may be returned than the nominal value of the shares (e.g. € 1,00 per share).

What is the typical use of a share redemption in Cyprus?

Redeemable Shares can be considered as quasi-capital in the Company. They are equity until the board decides they are not and in case the right of redemption is with the shareholder then they are a loan. They can rank pari passu with all other existing shares however at the same time the share rights might be limited to just receipt of dividend income at a fixed rate. Accordingly, the usefulness of these instruments is invaluable so long as they are structured correctly, in line with commercial reasoning and solid tax advise in order to comply with the ATAD provision.

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Harris Sharpe

Harris Sharpe

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For many years he has worked and devoted his skills and efforts towards building a successful career as a leading executive. From humble beginnings, his aim has always been to yield results; with a keen focus to attention to detail and client satisfaction. His experience has always been varied and not specific, at times he preferred it. With that in mind, he has dealt with CySEC on licensing and ongoing regulation, international private equity and credit fund managers, NASDAQ and NYSE listed companies occasional millionaires as well as self-made millionaires. His passion though is difficult transaction work organizing and deploying people for a common goal. Harris enjoys reading and studying the Cyprus law and sharing that information on this website.

Publications on Cyprus Business Law

Cyprus Annual Return HE32 for Companies

Cyprus private companies limited by shares are required to prepare and submit to the registrar of companies an annual return HE32. The Cyprus annual return HE32 must be accompanied by (1) Audited Financial Statements (the “FS”) and (2) Declaration of the Director and Secretary (the “Declaration”) confirming that the FS submitted are those presented to the shareholder at an Annual General Meeting (“AGM”)

Cyprus Company Formation

A company is formed in Cyprus by way of law. The principal legal instrument giving such right is the Companies Law, Chapter 113 of the laws of the Republic of Cyprus, however the memorandum and articles play an equal important role in a Cyprus Company Formation. These two ‘constitutional’ documents are often called upon to deal with business matters of the Company and in other times to define the rights of the various parties.

Private Company Limited by Shares

A Cyprus Private Company Limited by shares is a class of private companies incorporated in accordance with the Cyprus Companies Law, Chapter 113 of the laws of the Republic of Cyprus. It is the most frequently used vehicle in Cyprus its numbers, statistics of the Registrar of Companies, being over 200.000 and on an annual basis around 14.000 new companies are incorporated every year.

Cyprus Registrar Forms legality issues and effect

Within the Companies Law, Chapter 113 of the Laws of the Republic of Cyprus the term “Prescribed Form” (καθορισµένο τύπο) which means the Cyprus Registrar Forms is mentioned several times. Although the Companies law requires information to be submitted in the Prescribed Form this does not create automatic legality of the said action (e.g. change of director) is not implied

Transfer of shares when is it effective?

In the case of Morsa Trading the district court held that a person becomes a registered member of a Cyprus company when that person’s name is registered in the register of members. Accordingly, the transfer of shares in a Cypriot Company requires, amongst other things, the registration in the register of members.

Company Migration to Cyprus

Migrating a company to Cyprus is not without its challenges, nevertheless if the foreign countries laws allow a company may redomicile and migrate to Cyprus. After which time it will be registered under the companies law.

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