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04 Apr 2019

Cyprus company as an effective instrument of the relationship regulation between co-founders

Most startups and operating companies owned by two or more co-founders are at risk of failure as a result of co-founder conflicts.

In general, having conflicts in co-founder relationship is normal – this is not necessary a sign of approaching failure (not at all). Even successful business with founders bound by family ties most likely will face with corporates disputes between co-founders in long term perspective.

However, it always matters how founders deals with such conflicts - that's where the real difference between a successful business and the loss of money.

So, how can registering a company in Cyprus help you not to make conflicts between the co-founders a real business problem?

Secrets of the popularity of holding companies in Cyprus

It does not matter in which country the founders of the company are located - you can always take advantage of the benefits of Cyprus to settle the relations between the founders. To do this, it is enough to register a holding company in Cyprus. For the purposes of effective corporate governance and tax planning, incorporation of holding company is always a good idea.

Also, the good idea is formalizing the relationships between the co-founders, particularly addressing procedures for resolving potential disagreements and disputes. To do so, it is possible to conclude appropriate shareholders agreement at the level of the holding company between co-founders. Conclusion of the shareholders agreement in its classical form is possible only in common law countries (in particular - Cyprus).

Some of civil law countries also allow concluding shareholders agreement, but its effect will be limited by local legislation (that will prevail in case of conflict with provisions of shareholders agreement).

Shareholder agreement in Cyprus

What is the purpose of shareholder agreement in regulation of disputes between co-founders? Firstly, such agreement assumes effective ways of controlling the activities of a director by shareholders and peculiarities of operating of the board of directors (if such exists). Moreover, such an agreement may provide procedures for regulating disputes among shareholders, resolving conflicts, provisions on mediation and purchasing shares.

In order to avoid restricting the exclusive powers of the directors, special procedures and special rights of the founders can be agreed between co-founders in shareholders agreement: provision according to which only two or more founders holding 51% or more of the shares are permitted to submit for consideration and approval by the directors recommendations and suggestions regarding financing of the company, provision of collateral, rules to resolve a deadlock, etc.

Supervisory Board in holding companies - how does it work?

Supervisory Board may be an effective instrument in regulation of disputes between co-founders. This corporate governance body may have a right to resolve issues between shareholders, control the financial activity in the company and its further development. Furthermore, founders can be appointed as a members of Supervisory Board and this allow them to be aware and directly participate in all the important business processes.

Court actions in Cyprus as the last way to resolve conflicts between the co-founders

Courts of Cyprus will resolve such disputes pursuant to Cyprus legislation – well known to most corporate consultants and international lawyers. Local authorities in Cyprus have strong experience of settling such disputes. In addition, the provisions of shareholder agreements are always taken into account in settling such disputes.

If you want to protect your shareholder’s rights, to be sure that your business will always works effectively, you should incorporate company or holding in Cyprus. Our specialists will be glad to consult you on all issues related to registration of the company in Cyprus, and how to prevent or settle corporate disputes!

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