1 OVERVIEW
Having been a member of the European Union since 2004, Cyprus is an attractive jurisdiction for Mergers and Acquisitions ("M&A"). Moreover, it is simpler to form and implement business contracts, finance and collateral contracts, and other agreements in Cyprus in a style that is recognisable to financiers and their advisers since the country is a common law jurisdiction.
After a strong growth of 5.1% in 2022, the economic activity in Cyprus slowed down in 2023, while for the years 2024 and 2025, the real GDP is expected to recover. For the years 2024 and 2025, real GDP is expected to grow by 2.8% and 3% respectively. For the first quarter of 2024, the growth rate of the economy was estimated at 3.3% (seasonal adjusted data).1 The labour market is showing resilience and employment is expected to continue increasing at a steady pace. Cyprus ended 2023 with a fiscal surplus of 918.7 million euros and the budget is expected to remain in a surplus for 2024.
A strong inflow of foreign investment in real estate boosted investment in construction. Tourism performed better than expected, despite the absence of the Russian market. Other exports of services such as ICT, financial and professional services continued to grow, also making the economy less reliant on tourism. Tourism and other export-oriented services are expected to continue growing, but at a slower pace. It should be noted that Cyprus is also an established shipping centre and there has been an increase in the registration of ships in the Cyprus registry, as well as growth in the EU-approved Tonnage Tax System companies.
M&A transactions in Cyprus find their roots in principles of common law and in provisions of the laws, mainly by the Takeover Bids Law (Law to make provision for public takeover bids for the acquisition of securities of companies and related matters) (Law 41(I)/2007 as amended from time to time). Moreover, the Companies Law, Cap. 113 ("Companies Law") includes provisions regarding mergers, the exchange of shares between companies, divisions, reconstruction, amalgamations, etc. Additionally, the Companies Law displays the regulatory framework for the cross-border mergers of limited liability companies inside the borders of the European Union.
Other relevant legislations are: the Cyprus Securities and Stock Exchange Law (Law 14(I)/1993); the Transparency Requirements Law 190(I)/2007; the Market Abuse Law 102(I)/2016; the Control of Concentrations between Enterprises Law 83(I)/2014 (relating to fair competition); the Income Tax Law 118(I)/2002; and the Safeguarding and Protection of Employees Rights in the Event of the Transfer of Undertakings 104(I)/2000.
The relevant authority regulating M&A in Cyprus is the Cyprus Securities and Exchange Commission ("CySEC") having the legal authority to act in accordance with the law either ex officio or on the basis of a complaint that has been brought to it. Its powers include investigating administrative violations and imposing sanctions, as well as conducting inspections; however, these are non-exhaustive powers and it has the possibility to regulate, oversee and enforce the provisions of the Takeover Bids Law.
Other key regulatory authorities are: the Registrar of Companies, which is in charge of recording the changes in management and shareholding of public and private companies; the Commission for the Protection of Competition, which is the national authority to which notifications are being made in relation to M&A meeting the relevant threshold; and the Cyprus Stock Exchange in regard to listed companies.
The Takeover Bids Law applies to all types of companies without making distinctions. Specifically, it applies to every takeover bid for the securities of a Cyprus-registered company where its securities are listed on the Cyprus Stock Exchange (regulated market) but also to all takeover bids for the securities of a company that is registered outside of Cyprus when any of the prerequisites of section 4(3) of the Takeover Bids Law are met.
It is worth noting that, at the present time, there are no specific regulations for foreign buyers but certain sectors, namely the financial services and insurance sectors as well as the banking sector, are subject to consents from the CySEC, the Superintendent and the Central Bank of Cyprus accordingly. The Business of Credit Institutions Law 66(I)/1997 is relevant in this regard as it governs acquisitions in the banking sector together with subsidiary legislation published by the Central Bank. The Cypriot Parliament is currently considering a bill (draft law) (i) with regard to the control of foreign direct investments, which aims to protect sensitive fields of the economy, and (ii) the establishment and operation of collective investment organisation management companies, which aims to regulate the licensing and operation of fund managers.
Regarding the liabilities in relation to M&A in Cyprus, there have not been any judicial cases. Usually, the CySEC issues written warnings and fines or sanctions the violations of the Law. The ceiling regarding the fine is fixed at 342,000 euros, which can be doubled in the case of continued breach (Part XI of the Takeover Bids Law, section 46).
As to the process and timeframe of the acquisition, the process starts with the announcement of the offeror of its intentions to make a takeover bid. To count as an announcement, there must be a real intention, or the offeror must have acquired securities making it mandatory to make a takeover bid. The offeror must then convene a general meeting of shareholders to approve this decision and submit the offer to the CySEC and the target board. The CySEC will review the submission and may request additional information from the offeror if necessary. Once the CySEC's decision is final, the offeror must then send a copy of the offer document to the holders of securities in relation to the bid. Finally, the acceptance period starts (between 30 and 55 days, although it can be extended to 75 days) and "within [three] months of the end of the time allowed for acceptance of the bid", the offeror has the right to "squeeze-out" (section 36(2) of the Takeover Bids Law).
Aside from the acquisition method made through a public takeover bid governed by the Takeover Bids Law, there are three additional alternatives in Cyprus: by acquiring shares directly from the shareholders of the target when it is an unlisted public company; through a court-sanctioned scheme provided by sections 198 to 200 of Cap 113; or by following sections 201A to 201H of Cap 113 regarding the merger and division of public companies.
2 SIGNIFICANT DEALS AND HIGHLIGHTS
The number and value of Cyprus domestic M&A is much smaller than that of the international M&A transactions involving Cyprus entities, reflecting the fact that Cyprus is geared towards international M&A activity and restructurings. Some notable M&A transactions relevant to Cyprus for 2023 that our firm has engaged in are as follows:
- We assisted and acted on the acquisition of a certain stake in a public entity registered in Cyprus. The acquisition was made in the wider content of the initial public offering (IPO) and listing on the Bucharest Stock Exchange of the Cyprus entity, which our firm undertook. This transaction, valued at approximately 482 million euros, marks the largest IPO on the Bucharest Stock Exchange in the last five years. The European Bank for Reconstruction and Development (EBRD) has supported this milestone IPO by acquiring 11% of the offering, following a 15.5 million euros investment. The investment is expected to represent just over 3% of the company post-IPO.
- We assisted with the sale by our client of the majority shareholding in an entity listed on the Emerging Companies Market of the Cyprus Stock Exchange, which in turn owns the largest malls in Cyprus.
3 KEY DEVELOPMENTS
In 2022, the new transfer pricing legislation was passed by the Cypriot Parliament for the first time and incorporated the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations ("OECD TP Guidelines"), as well as providing a detailed transfer pricing legislation. The legislation aims to align Cyprus with the OECD Transfer Pricing Guidelines and to introduce transfer pricing rules and documentation requirements for transactions between related parties. This may have implications for the valuation and taxation of M&A deals involving Cyprus entities. This, together with the fact that this legislation also requires the prices and terms of the transactions to be consistent with those that would be agreed upon by independent parties under similar circumstances, may affect the profitability and valuation of M&A involving this type of party, as well as the risk for tax adaptations. On 1 February 2024, the Cyprus Tax Commissioner issued a notification amending the transfer pricing limits of reportable transactions.
Some other regulations that may affect M&A and especially the tax aspects of such transactions in Cyprus include the following:
- The introduction of green taxes that aim to reduce greenhouse gas emissions and promote environmental sustainability. Some examples of green taxes that may be introduced in Cyprus are carbon taxes, plastic taxes and vehicle taxes.
- The digitisation of the tax department, which is a project that aims to modernise and streamline the tax administration system in Cyprus by using digital technologies and platforms. The project is expected to improve tax compliance, efficiency and transparency.
- The introduction of a global minimum tax for multinational enterprises regardless of their headquarters location, which is part of the BEPS 2.0 global tax reform initiative. This initiative intends to consolidate unilateral taxation regimes into an overall consensus between BEPS participant countries (the Inclusive Framework) to avoid double taxation or inconsistent tax treatments. Led by the OECD and G20, it seeks to achieve a fairer distribution of taxing rights among countries. BEPS 2.0 consists of two pillars: Pillar One, which allocates more taxing rights to market jurisdictions where customers or users are located; and Pillar Two, which establishes a global minimum tax rate of 15% to prevent profit shifting and tax competition.
Another key development is being introduced by the EU regulation on foreign subsidies distorting the internal market, that is Regulation (EU) 2022/2560. Its provisions apply from 12 July 2023, and they will have crucial impact on M&A transactions. According to this new regulation, M&A transactions must be notified to the European Commission as of 12 October 2023 if their purpose is the acquisition of the sole or joint control of a business or the creation of a joint venture. This notification requirement is in alignment with the ongoing effort to increase scrutiny of non-EU investments in the EU. It is, however, worth noting that such transactions are only notifiable if some conditions are met; namely, if the acquired company (or one of them), or the joint venture: has a total turnover in the EU of at least 500 million euros in the last financial year; is based in the EU; and, where companies involved in the transaction have received financial contributions from non-EU countries, it is notifiable if the amount totals more than 50 million euros in the last three years.
In this regard, companies should pay special attention to subsidy control when planning M&A deals when these fall under the subsidy control regime. To date, the European Commission has only controlled subsidies granted by Member States within the EU under provisions of state aid (Article 107, TFEU). However, with this new Regulation, it also prevents distortions of competition in the EU's internal market that could arise from subsidies by third countries. This will likely affect M&A, so thorough planning should be undertaken.
Institutional shareholders may influence the approval of M&A deals involving public companies in Cyprus, as they may own large portions of such companies and vote at general meetings. The Takeover Bids Law requires a takeover bid for a public company in Cyprus to be approved by more than half of the voting rights attached to the securities that are subject to the bid. Therefore, institutional shareholders may have the ability to accept or reject a takeover bid or affect its outcome by negotiating with the bidder or the target board. Likewise, they may also participate in initiating or supporting M&A deals involving public companies in Cyprus, as they may act as activist investors who seek to change the strategic direction and corporate governance of such companies. According to a report by PwC, credit conditions in early 2024 have improved compared to 2023 when institutional lenders were struggling to syndicate debt.2
According to a report by Freshfields, private credit have also stepped up to fill the void that arose and family offices and sovereign wealth money will also continue to boost the equity checks for acquisitions.3 Therefore, institutional shareholders may have higher expectations and valuation multiples for M&A deals or demand higher premiums or special dividends to support such deals. Alternatively, institutional shareholders may also be ready to sell their shares at lower prices if they face liquidity pressures or seek to diversify their portfolios.
Finally, with Regulation (EU) 2023/914, the European Commission, in an effort to simplify EU merger control procedures, has repealed the Regulation (EU) 1269/2013 in order to replace it with this new Regulation. It entered into force on 1 September 2023. This Regulation includes (i) a revised Merger Implementing Regulation ("Implementing Regulation"), (ii) a Notice on Simplified Procedure ("Notice"), and (iii) a Communication on the transmission of documents ("Communication").
4 INDUSTRY SECTOR FOCUS
There are some sector-specific reasons for M&A activity in Cyprus, such as:
- Banking and financial services: undergoing consolidation and restructuring, and facing disruption from platforms and FinTech, which is driving rapid technological changes and boosting M&A as players seek to acquire digital capabilities.
- Energy: experiencing increased interest from foreign investors, especially in the exploration and exploitation of hydrocarbons in the Eastern Mediterranean region, as well as in renewable energy projects.
- Real estate: benefitting from the Cyprus Investment Programme, which offers citizenship to non-EU nationals who invest a minimum amount in real estate or other sectors in Cyprus.
- Tourism and hospitality: recovering from the impact of the COVID-19 pandemic and attracting investments from international hotel chains and operators.
- Private equity funds: seeing increased growth and activity in the M&A space.
- Technology and digitalisation: expected to grow in M&A following the adoption by Cyprus of The Digital Strategy for Cyprus 2020–2025, which aims to enhance the digital transformation of the economy and society.
Additionally, software deals will continue to dominate the TMT sector, as well as other areas such as telecoms, the metaverse and video games, and deliver higher returns to shareholders.
5 THE YEAR AHEAD
Following the ongoing war between Russia and Ukraine, the international scene has critically changed. The war has caused uncertainty, unpredictability, market disruptions and general instability, significantly affecting all sectors and conditioning the financial markets. Moreover, the conflict has led to serious inflation and an increase in the cost of living.
The consequences of the war include substantial sanctions imposed by the EU, the United States and other countries against Russian individuals and entities. Initially, an agreement was made to remove several Russian financial institutions from the SWIFT payment system, but the sanctions have since become stricter, making it much more difficult, if not impossible, to transfer funds in and out of Russia.
These sanctions and the ongoing war affect the global economy. Despite this, there is a consistent demand for M&A, both for new market opportunities and to achieve more efficient structures. This demand is found both locally and across the border.4
Footnotes
2. https://www.pwc.com/gx/en/services/deals/trends.html
3. https://blog.freshfields.us/post/102ixd2/ma-predictions-and-guidance-for-2024
4. https://www.legal500.com/guides/chapter/cyprus-mergers-acquisitions
Originally published by Global Legal Insights – Mergers & Acquisitions 2024.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.