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SECURITIES - MINORITY OWNERS UNHAPPY WITH COMING EU RULES

Feeling the pinch

MAJORITY owners of firms in Slovakia may get the right to squeeze out minority shareholders as of the beginning of next year in line with a European Union requirement that member countries introduce the squeeze-out institution in their legislation.

MAJORITY owners of firms in Slovakia may get the right to squeeze out minority shareholders as of the beginning of next year in line with a European Union requirement that member countries introduce the squeeze-out institution in their legislation.

The prospect of 90 percent owners forcing minority shareholders to accept buyout offers has aroused passionate debate for several months in Slovakia, with terms such as "expropriation" and "constitutional rights" stoking the fires.

Work on an amendment to the Act on Securities and Investment Services, which would introduce the institution, has stopped for now due to the approach of elections in June. The next parliament should decide on the final version of the Act in September this year.

According the EU directive, if a majority owner holds at least 90 percent of shares in a company, he may be allowed to force some minority shareholders to accept a buyout offer; the practice is known as a squeeze-out.

According to the original Finance Ministry draft, a 90 percent majority owner may under certain circumstances squeeze out minority shareholders within three months of offering to buy the 10 percent of remaining shares.

The condition for this squeeze-out is that 90 percent of the minority shareholders agree to the buyout offer. If that condition is met, the majority shareholder is allowed to squeeze out those minority shareholders who refused to sell their shares in the buyout.

Despite all of the heated debate, the squeeze-out clause only applies to 1 percent of all shares in a company, and de facto requires the approval of 99 percent of shareholders. The squeeze-out shares fetch the same price as accepted in the buyout.

The amendment would also introduce a protection mechanism for minority shareholders according to which the majority shareholder would be obliged to buy out the shares of minority shareholders at the latter's request (known as the sell-out convention).

"Majority owners of firms in Slovakia will be able to squeeze out small shareholders from the beginning of next year at the earliest," Vladimír Dvořáček, the head of the financial markets section at the Finance Ministry, told the SITA agency.

However, market insiders question whether the measure would be in keeping with Slovak law.

"The constitution protects private ownership, and expropriation is done only in the public interest. However, in this case it is hard to identify a public interest. It is clearly in the interest of a private company," said Robert Kopál, director of the Securities Brokerage Association.

According to the Finance Ministry, the greatest problem in talks so far has been the compensation provided to minority owners that get squeezed out.

Based on the EU directive, minority shareholders should be permitted to invest the money they get for their squeezed-out shares in another company.

But according to Kopál, Slovakia's underdeveloped capital market, with its low trading volumes, is unable to guarantee minority owners an appropriate counter-value in another stock.

"This means that if, for example, Slovnaft [refinery] squeezed out its minority shareholders, these shareholders should be able to buy shares in a similar company for the price they got from Slovnaft - another refinery or a company in an oil industry, let's say. But this is impossible on the Slovak capital market where so few companies are traded," Kopál said.

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