A significant legal issue that Cypriot courts have not yet addressed is the potential conflict between a company’s memorandum and articles of association and a private agreement between the company and/or its members with third parties.
First and foremost, according to the Contract Law (Cap. 149), the binding nature of any contract entered into between two or more parties is indisputable, provided that the relevant conditions set out in Article 10.1 of the said Law are met:
- The parties intend to be bound by the legal consequences arising from the contract (free consent).
- The parties have the legal capacity to contract.
- The contract constitutes a lawful consideration and serves a lawful purpose.
- It is not a contract that the law deems void.
Therefore, as a general principle, a contract is considered binding on the contracting parties if the aforementioned conditions are met.
However, a critical question arises as to whether the binding nature of a contract is affected when a private agreement between shareholders or the company contradicts the provisions of the articles of association.
Legal Supremacy of the Articles of Association Over Private Agreements
According to prevailing legal doctrine, a company’s articles of association take precedence in the event of a conflict between its provisions and a shareholders’ agreement unless there is an explicit provision in the articles recognising or regulating the specific agreement.
The supremacy of the articles of association is confirmed by the provisions of the Companies Law – Cap. 113, specifically:
- Article 21(1): “the memorandum and articles shall, when registered, bind the company and the members thereof”
- In particular, the memorandum and the articles bind the company and its members ” to the same extent as if they respectively had been signed and sealed by each member”.
- This means that the provisions of the articles have legally binding force in regulating the relationships between the members and the company as a legal entity. Consequently, anything contrary to the articles (including private agreements) is not legally binding unless the articles are duly amended.
- Article 12(1): Provides that any alteration to the articles requires a special resolution of the shareholders.
- This emphasises that the terms of the articles cannot be circumvented through private agreements except through the proper amendment procedure.
English Case Law:
Cypriot courts have not yet issued relevant decisions. As a result, guidance is drawn from English case law. Three key cases highlight the importance of the supremacy of the articles of association:
- Russell v Northern Bank Development Corporation Ltd [1992] 1 WLR 588:
- The House of Lords ruled that a shareholders’ agreement restricting the company’s ability to increase its share capital was void because it contravened the articles of association and statutory provisions allowing capital alteration.
- Shuttleworth v Cox Brothers and Co (Maidenhead) Ltd [1927] 2 KB 9:
- The Court of Appeal held that the provisions of the articles take precedence over any private agreement between shareholders unless such an agreement has been incorporated into the articles through a lawful amendment.
- This underscores the necessity of incorporating private agreements into the articles to give them legal effect.
- Welton v Saffery [1897] AC 299:
- The Privy Council ruled that a company’s articles form the fundamental regulatory framework and that private agreements cannot override them unless explicitly incorporated.
Consequently, English case law clarifies that a company’s articles of association take precedence over conflicting private agreements. For such agreements to be legally binding, they must be incorporated into the articles through the appropriate amendment procedure.
Exceptions – When a Private Agreement May Prevail:
There are limited exceptions where a private agreement may take precedence:
- If the Private Agreement Does Not Conflict with the Articles
- A private agreement may be valid as long as it supplements rather than contradicts the articles.
- If the Articles Recognise the Agreement
- If the articles explicitly provide for or acknowledge the existence of a shareholders’ agreement, the agreement may be legally binding.
- If the Agreement Applies Only to the Contracting Shareholders
- Shareholders may enter into private agreements among themselves, provided that such agreements bind only the contracting parties and do not affect the company’s operations or the rights of other shareholders.
Application in Cyprus:
Under Cypriot law, a company’s articles of association prevail over any private agreement between shareholders or directors if the agreement contradicts the articles.
- The articles, as the fundamental document defining the company’s structure, powers, and operational procedures, bind all members.
- They cannot be modified or overridden by private agreements unless such agreements are incorporated into the articles through the prescribed amendment process.
Hence, when a private agreement conflicts with the articles, the agreement is deemed void to the extent that it contradicts the articles. To hold legal validity, it must be incorporated into the articles through an amendment process that requires a special resolution from shareholders (Article 12(1) of the Companies Law – Cap. 113).
Conclusion
The significance of the articles of association in governing corporate relationships is indisputable, as they serve as the defining regulatory framework for the company. They take precedence over any conflicting private agreement, ensuring transparency and the protection of all shareholders’ rights.
To avoid legal uncertainties and disputes, shareholders must ensure that any agreement concerning the company’s operations aligns with the articles or is incorporated through an amendment.
Author:
Semeli Epifaniou
Lawyer /Corporate Department