t is generally accepted that one of the main causes of the banking crisis in Cyprus was failed corporate governance and risk management strategies. The financial crisis has highlighted the significance of following corporate governance rules and the use of such rules as preventative measures and tools for creating a risk-efficient economic environment. It has been recognized that, in a bid to attract investors following the crisis, companies must actively promote transparency, risk management and corporate governance.

Year by year, corporate governance is becoming a more fundamental and all-encompassing topic. The 2013 banking crisis revealed many shortcomings in corporate governance, particularly in the banking sector, but also in the corporate sector as a whole. As a condition of international financial support the government was obliged to commit itself to a multifaceted economic adjustment programme, in which reform and modernization of the framework of legal and corporate governance played a substantial part.

In April 2015 legislation was passed by the Cyprus parliament to amend the provisions of the Companies Law dealing with insolvency, and draft legislation has been submitted to the parliament to modernize the office of the Registrar of Companies, with a view to improving its effectiveness in supervising and regulating companies.

The main Corporate Entities, Legislation and Supervision

Corporate Governance is relevant to both private and public companies; it’s the system by which business corporations are controlled and directed. The corporate governance structure covers topics such as the accountability of the Board of Directors to the Shareholders, the distribution of rights and responsibilities among different participants in the corporation, such as the Company Shareholders, the Managers and the Board of Directors.

The basic law regulating corporate entities in Cyprus is the Companies Law, Cap. 113 as amended (“the Companies Law”). While it provides for the formation of several categories of companies, including companies limited by shares and by guarantee, the company limited by shares is overwhelmingly the most commonly used for commercial business.

A private company is defined as one which by its articles of association specifically restricts the right to transfer its shares, limits the number of its members to 50, prohibits any invitation to the public to subscribe for its shares or debentures and prohibits the issue of bearer shares.

A public company is any other company that does not fall within the above-mentioned framework. The regulatory requirements for public companies are generally more rigorous than for private companies, because of the greater degree of separation between ownership and management. Public companies are required to satisfy a number of criteria, most importantly that they must have at least seven members, they must have an authorized and paid up share capital of at least €25,629, and they must issue a prospectus or statement in lieu of a prospectus in a specified form before issuing and shares or debentures to the public.

Legislation

The Companies Law sets out the basic corporate governance principles. It regulates the rights of members between themselves and with the company and sets out powers and duties of Directors, and the procedures for their appointment and removal. It prescribes basic accounting and reporting requirements, and requires the appointment of auditors to report to the members on the Directors’ stewardship.

In addition, there are specific laws regulating companies that issue publicly-treated securities, namely:

• The Cyprus Securities and Stock Exchange Laws of 1993-2007 as amended, together with regulations issued under them.
• The Insider Dealing and Market Manipulation (Market Abuse) Law of 2005, Law 116(I)/2005 as amended (“The Market Abuse Law”).
• The Transparency Requirements (Securities Admitted to Trading on a Regulated Market) Laws of 2007 to 2014, Law 190(I)/2007 as amended (“the Transparency Law”).
• The Takeover Bids Law of 2007, Law 41(I) of 2007 as amended (“the Takeover Bids Law”).
• The Cyprus Securities and Exchange Commission Law of 2009, Law 73(I)/2009 as amended.
• The Investment Services and Activities and Regulated Markets Law of 2007, Law 144(I)/2007.
• The Corporate Governance Code, 4^th edition, April 2014 (‘the Code”).

The Market Abuse Law, the Transparency Law and the Takeover Bids Law implement the corresponding EU Directives.

Supervision

In Cyprus, the Department of the Registrar of Companies and Official Receiver (DRCOR) is responsible for the registration, compliance and winding up of companies, while the approvals for listing on the CSE are granted by the Cyprus Securities and Exchange Commission (CySEC).

CySEC is a public corporate body and the principal regulatory body for issuers of traded securities and regulated markets. It regulatory issues directives and circulars complementing and explain the corporate governance regulatory framework. Its main responsibilities include the supervision of the Cyprus Stock Exchange (“CSE”), of issuers of listed securities, the licensing of investment firms and the imposition of administrative sanctions and penalties for infringement of the stock market laws and regulations.

Moreover, due to the recession that hit the Cyprus stock market in 2000, the CSE issued the first Corporate Governance Code aiming to introduce a set of corporate governance principles, offering additional protection to the Shareholders of listed companies. Currently, the 4^th revised version of the Code applies, which has replaced the Corporate Governance Code issued in March 2011 and amended in September 2012. The Code contains a set of legal principles, rather than inflexible legal rules. It is only obligatory for companies listed on the Main Market and, in part, it is also mandatory for companies listed on the Parallel Market.

The Code aims to strengthen the monitoring role of the Board of Directors, to protect minority company Shareholders, to create more transparency and to provide timely information, as well as to sufficiently safeguard the independence of the Board of Directors in its decision-making process. Private companies are not bound by its provisions however are encouraged to consider it as a guidance and utilize it as a best practice model.

Listed companies have an obligation to include in their Board of directors’ annual report to company shareholders, a report on corporate governance as follows: The company should state in the first part of the report whether the principles of the Code are being implemented. The company should confirm in the second part of the report that it complies with the principles of the code and, in the event that it does not, should give explanations for non-compliance with the code. With the aforementioned as a background the following analysis intends to give a brief examinations of the provisions of the code.

Corporate Leadership

The Board of Directors

Management of the company is delegated to the board of directors. The Companies Law provides for a one-tier structure in which the board exercises its powers as a whole. There is no supervisory board or similar body envisaged in the Companies Law. Committees of Directors may be established and individual directors can be empowered to represent the company by a board resolution or under a power of attorney given by the company.

The Board’s Balance

The Code confirms the principle that every listed company should be headed by an effective board, which provides guidance and controls the company. Section A.2 of the Code recommends that the board should comprise an appropriate balance of independent non-executive and other Directors, so that no individual Director or a small group of Directors can dominate the board’s decision-making. Non-executive Directors should have sufficient skills, knowledge and experience, since their views carry significant weight in decision-making process. According to the Code, the roles of the Chairman of the Board and the Chief Executive Officer should not be exercised by the same individual. The division of responsibilities between them should be clearly established, set out in writing and agreed by the board.

Supply of information

The Board of Directors should be supplied in a timely manner with the reliable and comprehensive information to enable it to discharge its duties; Chairman have the responsibility to be properly informed on issues that arise in relation to the company.

Appointments to the Board

Pursuant to the principle, there should be a transparent procedure for the appointment of new Company Directors to the Board. The Board should be consisted of competent individuals able to contribute on the board of Directors of the company. Section A.4.2. of the Code provides that the appointment of suitable and competent persons should take into consideration their integrity and honesty and their knowledge and experience.

Re-Election

Furthermore, the principle states that at least every three years all Company Directors should resign from office at regular internal. However, they do have the right (under specific provisions) to submit themselves for re-election.

Director’s Remuneration

The Code provides that a Remuneration Committee should be established, consisting exclusively of non-executive Company Directors in order to avoid possible conflicts of interest, to make proposals to the Board on the context and level of remuneration and to decide for the remuneration packages. At least one member with knowledge and experience of remuneration policy should be included in the committee. At the general meetings, the Company Shareholders approved the remuneration of Company Directors. The level of remuneration should be sufficient to attract, retain and give incentives to Executive Company Directors, in order to run the Company successfully. In addition, Regulation 76 of Table A of the Companies Law provides that the general meeting of a Company is able to decide on the directors’ remuneration. Moreover, section 188 of the Companies’ Law, indicates that the relevant details must be included in the financial statements presented before the general meeting for approval.

Disclosure

The primary sources of the corporate governance disclosure requirements include the Code, the Transparency Law and the Market Manipulation Law.

Section 187 of the Companies law requires every company to maintain a register full of details of each director’s interests in the shares of the company. The register must be kept at the company’s registered office and be open to inspection by shareholders and debenture holders.

The Code imposes an obligation on listed companies to include in the annual report a report on corporate governance by the board. The first part of the report should specify whether the company complies with the Code and the extent to which it implements its principles. The second part of the report should contain a confirmation that the company has complied with the provisions of the Code and, in the event that it has not done so, it should specify the reasons for its non-compliance (“comply or explain” approach).

The Transparency Law concerns to legal entities whose transferable securities have been admitted to trading on a regulated market. A number of disclosures should be made in relation to such entities.

Furthermore, disclosure obligations are imposed by the Market Manipulation Law, which aims to eliminate insider dealing and market manipulation. According to Section 11 of Market Manipulation Law, companies that deal inn financial instruments traded on a regulated market should publish inside information that directly concerns them and significantly affects the prices of the relevant instruments. Such information should be published by announcement to the CSE, which will then publish it on its website, by announcement to CySEC and by announcement on the website of the issuer.

Accountability and Audit-Financial Reporting

The Board of Directors should submit a balanced, detailed and understandable assessment of the company’s position and prospects. For instance, the Board’s responsibility is to submit all public reports, reports to regulators and information needed by legislation.

Internal Control

According to the principle, the Board of Directors should maintain a sound system of internal control in order to safeguard shareholders’ investments and the company’s assets.

Shareholders

A shareholder of a company is a natural or legal person that has legal title to the shares of a company and is able to enjoy and exercise the rights attaching to such shares.

Shareholder rights and powers

While day-to-day management and operation of a company is the responsibility of the directors, the Companies Law reserves certain important areas to the shareholders in general meeting, including changes to the company’s name or its constitutional documents (the memorandum and articles of association), any proposed increase or reduction of its share capital, variations of shareholders’ rights, the authorization of the acquisition by the company of part of its own shares, the approval of an amalgamation or scheme of reconstruction, the appointment and removal of directors and auditors and the fixing of their remuneration, the approval of final dividends proposed by the directors, the approval of the statutory report, consent for allowing financial assistance for the purchase of the company’s own shares (in case of private companies) and the passing of a resolution for the company to be wound up. Some of the more fundamental of these matters (for example changes to the company’s name or reduction of its share capital, variations of shareholders’ rights and resolution to wind up the company) require the passing of a special resolution requiring a 75% majority in favor.

Directive 2007/36/EC, the Shareholder Rights Directive, was transposed into the Companies Law by Law 60(I)/2010, introducing new rights for shareholders in publicly listed companies regarding timely provisions by the company of relevant information and participation at general meetings, including remote participation by electronic means.

Shareholders responsibilities

The Companies Law does not impose any responsibilities on shareholders regarding corporate governance. The Code recommends that there should be a constructive use of the annual general meeting (AGM) of a company, and encourages shareholder participation, but does not make any provision beyond this.

The Companies Law requires an AGM to be held no later than 18 months after the date of incorporation and thereafter every year, and no later than 15 months after the date of the previous AGM. At least 21 days’ notice must be given unless all the members who are entitled to attend and vote agree to shorter notice.

Shareholders activism

Although a management and control of a company is vested in the Board of Directors, the Shareholders nevertheless have the power to put pressure on the company’s management body.

The most substantial power vested in Shareholders is that they have direct control over the composition of the Board of Directors and, although they do not have control over what decision or action is taken by the directors, this can nevertheless affect the decisions taken by the Directors in an indirect manner. In addition, both Companies’ Law and the Code promote the giving of information to Shareholders.

Despite the fact that Cypriot courts are reluctant to interfere with the internal management of a company, Section 202 of the Companies Law entitles any member of a company who complains that the affairs of the company are being conducted in a manner oppressive to some part of the members (including the member concerned) to apply to the court for an order to remedy the situation.

In addition, minority shareholders have the right to bring a derivative action, which is a personal action against a director as representative of the company, in instances such as fraud against the minority, negligence, default, breach of duty or breach of trust. The company is joined as a defendant. Shareholders may also take proceedings in a personal capacity to enforce their personal rights.

Contact with Shareholders

The Code generally promotes contact with Shareholders through the drawing up of reports. The Code specifically provides that Shareholders should be given timely and precise repots on all material changes concerning the company, including its financial condition, performance, ownership and corporate governance.

Conclusion

Many aspects of corporate governance in Cyprus remain topical and important. Following the financial crisis, certain matters are at the top of the agenda of governments and regulatory bodies, for example, effective risk management and controlled decisions.

Corporate governance is considered as an issue of great importance to the Government of Cyprus and the Minister of Finance. The authorities in Cyprus continually monitor both the development of corporate matters in general in Cyprus as well as the compliance of public companies with the Code, for which it constantly pushes for compliance. Recent developments in relation to greater education regarding corporate governance and the benefits of proper enforcement and implementation to businessmen/businesswomen, service providers and the authorities highlight the efforts being made to improve both the governance of public companies in Cyprus and also private companies.