Competition (Mergers & Acquisitions)

Companies that decide to participate in a merger or to carry out acquisitions of other companies, should be aware that these transactions need to comply with two pieces of legislation: the Concentrations Law (Law 22(I)/99) and the Companies Law, Cap. 113.

The Concentrations Law controls mergers and acquisitions of major importance between or among companies. If such concentrations create or strengthen a dominant position on a particular market where the merging companies carry on business, then such concentrations will be incompatible with a competitive market.

As a result, if you think that your company falls within the scope of the following provisions, we advise that you consult us immediately before even concluding the merger or acquisition so that we obtain a clearance from the Commission for the Protection of Competition (CPC) and to avoid any major fines that the CPC may impose on your company for breaching the Law and for your failure to notify (up to 10% of company’s revenue).

IMPORTANT: If your company meets the criteria described below to be considered as a concentration of undertakings of major importance, you must NOTIFY the concentration to the Competition Commission within 7 days from the date of conclusion of the agreement or the publication of the relevant offer of purchase or exchange or the acquisition of a controlling interest.

The Concentrations Law applies to concentrations of major importance, that is:

1. If two or more previously independent undertakings merge;
2. If one or more persons already controlling at least one undertaking, or one or more undertakings, acquire, directly or indirectly, whether by purchase of securities or assets, by agreement or otherwise, control of the whole or parts of one or more other undertakings; or
3. If a joint venture is established which permanently carries out all the functions of an autonomous economic entity (full-function joint venture).

A concentration is not considered to arise where:

1. Credit institutions or other financial institutions or insurance companies (the normal activities of which include transactions and dealings in securities for their own account or for the account of third parties), hold on a temporary basis securities which they have acquired in an undertaking with a view to reselling them, provided that they do not exercise voting rights in respect of these securities with a view to determining the competitive behavior of that undertaking or provided that they exercise such voting rights only with a view to preparing the disposal of all or part of that undertaking or of its assets or the disposal of those securities, and that any such disposal takes place within one year of the date of acquisition;
2. Control is exercised by a person authorized under the legislation relating to liquidation, bankruptcy, or any other similar procedure;
3. Where one or more persons already controlling at least one undertaking, or one or more undertakings acquire, directly or indirectly, whether by purchase of securities or assets, by agreement or otherwise, control of the whole or parts of one or more other undertakings, such operations being carried out by investment companies; or
4. Property is transferred under either a will or as a result of intestate devolution.

Furthermore, the Concentrations Law does not apply to a concentration of two or more undertakings each of which is a subsidiary of the same parent.

The term “control” for the purposes of the Concentrations Law, means control constituted by rights, contracts, or any other means which, either separately or in combination and having regard to the considerations of law or fact involved, confer the possibility of exercising decisive influence on an undertaking. This is, in particular, by ownership or enjoyment of rights over the whole or part of the assets of the undertaking, or rights or contracts which confer the possibility of decisive influence on the composition, meetings, or decisions of the organs of an undertaking.

Control is acquired by persons or undertakings which hold the rights or are entitled to rights under the contracts concerned, or, while not being holders of such rights under such contracts, have the power to exercise the rights deriving from such rights.

The criteria for assessing whether an act of concentration of undertakings is of major importance so that the Concentrations Law may apply, is as follows:

1. the aggregate turnover of each of at least two of the participating undertakings must exceed EUR 3.500.000;
2. at least one of the participating undertakings engages in commercial activities within the Republic of Cyprus; and
3. at least EUR 3.500.000 out of the aggregate turnover of all of the participating undertakings relate to the disposal of goods or the supply of services within the Republic.

The aggregate turnover comprises of the amounts deriving from the sale of products and the provision of services by the undertakings concerned during the preceding financial year and which correspond to the ordinary activities of the undertakings, after deducting discounts on sales, VAT and other taxes directly related to turnover. The aggregate turnover of an undertaking concerned does not include internal transactions carried out by that undertaking and companies within its group.

A concentration which takes place in stages, within a period of time not exceeding 4 years, and which results in the acquisition of the control of one undertaking by another, will be deemed to fall within the scope of application of the Concentrations Law and deemed to have taken place upon the occurrence of the final event as a result of which control was acquired.

The Companies Law as amended in 2003 for the purposes of harmonization with Third Council Directive 78/855/EEC, concerning mergers of public limited liability companies and Sixth Council Directive 82/891/EEC, concerning the division of public limited liability companies, has a whole section dedicated to the reorganization of public companies, effected by Mergers and Divisions.

IMPORTANT: Civil and criminal liability of the parties involved: The directors who have signed the reorganization plan and the recommendation report, as well as the experts who signed the evaluation report, shall be liable in respect of every loss resulting from negligent conduct in drawing up the consolidation or break down into shareholders of the company that is taken over or broken down.

Company reorganisations take place in the following ways:

1. Merger by acquisition of one or more public companies by another public company.
   A merger of this kind may take place in three ways:(a)An operation whereby one or more companies are wound up without going into liquidation and they transfer to another existing company all of their assets and liabilities in exchange for the issue to the shareholders shares of the latter company (the acquiring company) and any cash payment.(b)Acquisition of one company by another which holds 90 % or more of its shares(c)An operation whereby one or more public companies are wound up without going into liquidation and transfer all of their property, their assets and liabilities, to another company which is the holder of all their shares and other securities conferring the right to vote at general meetings:A merger by acquisition may also be effected where one or more of the companies being acquired is in liquidation, provided that the companies have not yet begun to distribute their assets between their shareholders:
2. Merger by the formation of a new company. This means the operation whereby several companies are wound up without going into liquidation and transfer to 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 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:A merger by the formation of a new company may also be effected where one or more of the companies which are ceasing to exist is in liquidation, provided that this option is restricted to companies which have not yet begun to distribute their assets between their shareholders.
3. The division of public companies. This includes:(a)A division by acquisition, that is, the operation whereby, after being wound up without going into liquidation, a company transfers to more than one existing company (hereinafter referred to as the recipient companies) all of its property (assets and liabilities) in exchange for the allocation to the shareholders of the company being divided, first, of shares in the companies receiving contributions as a result of the division and second, possibly an agreed cash payment.(b)A division by the formation of new companies, that is, the operation whereby, after being wound up without going into liquidation, a company transfers to more than one newly-formed company (hereinafter referred to as the recipient companies) all its property (assets and liabilities) in exchange for the allocation to its shareholders, firstly, of shares in the aforementioned companies which are the recipients of the contributions resulting from the division, and second, possibly an agreed cash payment.

A division by the formation of a new company may also be effected where the company being divided is in liquidation, provided that this option is restricted to companies which have not yet begun to distribute their assets between their shareholders.

The Law provides for the following:

The reorganisation plan must be published at least one month before the date fixed for the general meeting which is convened to decide thereon.

The reorganisation plan must be accompanied by a detailed written report drawn up by the directors of each of the merging companies explaining and setting out the economic and legal grounds of the merger and in particular the share exchange ratio, while making a reference to any special valuation difficulties which have arisen.

The reorganisation plan as well as the reports of each of the merging companies shall be examined by independent experts (natural or legal persons) who shall be specially appointed by the Court at the request of the companies involved. The companies involved may make a joint request for the appointment of such expert.

The expert shall draw up a written report – opinion intended for the shareholders. The experts must state whether in their opinion the share exchange ratio is fair and reasonable.