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BUSINESS ENVIRONMENT - NEW RULES REQUIRE MINORITY SHAREHOLDERS TO SELL HOLDINGS UNDER CERTAIN CONDITIONS

Squeeze-out could simplify ownership structures

The institution of "squeeze-out" (Slovak legal terminology recognises this term as "the right of buy-out") was introduced into Slovak law as of January 1 this year, and offers a new possibility for buying out minority shareholders in accordance with EC Directive 2004/25/EC on takeover bids.

The Slovnaft refinery is one of many firms that could benefit from squeeze-out.
photo: SITA

The institution of "squeeze-out" (Slovak legal terminology recognises this term as "the right of buy-out") was introduced into Slovak law as of January 1 this year, and offers a new possibility for buying out minority shareholders in accordance with EC Directive 2004/25/EC on takeover bids.

The right to buy-out minority shareholders may very soon affect joint-stock companies that are burdened by a fragmented ownership structure, as a result for example of the first wave of voucher privatization in the early 1990s. Examples of such companies include certain banks (VÚB, OTP Banka) and important domestic corporations (the Slovnaft refinery). The squeeze-out may help to improve and simplify administration of the target company in the future, especially when convening, organising and making decisions at general meetings of shareholders.


Squeeze-out preconditions


The squeeze-out in the Slovak Republic applies only to companies with listed shares, and only if the following conditions are met:

* The majority shareholder has carried out a mandatory or voluntary takeover bid announced after January 1, 2007, and this bid (i) has not been a partial bid (i.e. it has not applied solely to a part of the remaining shares held by minority shareholders), and (ii) has not been conditional (i.e. the maker of the offer has not committed to buy the shares only if his offer is accepted for a certain minimum number of shares);

* The majority shareholder holds at least 95 percent of shares carrying at least 95 percent of the voting rights in the target company. The shareholder's stake shall include, among other things, the voting rights carried by the shares held by a third person, if a written agreement on exercising voting rights exists between the maker of the offer and any such third person.


Squeeze-out process


The majority shareholder who intends to make use of the right of squeeze-out shall declare this intention and provide proof of the circumstances under which this right arose to the target company, the National Bank of Slovakia (NBS) and all remaining shareholders without delay. The right of squeeze-out shall be effective towards the respective minority shareholders only once the approval of NBS is granted. The NBS may only grant its approval if all the conditions for a squeeze-out have been met.

The right of squeeze-out may be used not later than three months after the last takeover bid has expired. To make use of this right, the majority shareholder shall deliver a proposed agreement on the purchase of shares or their exchange for other securities to all minority shareholders. The minority shareholders are to accept the proposal within the time limit set in the proposal, or otherwise within 10 days after approval is granted by the NBS. Should the minority shareholders not accept the proposal within the stated time limit, the majority shareholder may request that the court issue a ruling providing for acceptance.


Adequate compensation


The minority shareholders must be granted adequate compensation (a fair price) for their shares. This compensation may take the form of money, securities or a combination of the two. If the maker of the offer offers securities as compensation, he must also offer a cash alternative.

The criteria for what constitutes a fair price are minimum criteria. Compensation shall be regarded as adequate if it equals at least one of the following amounts:

a) The compensation offered during the course of the mandatory take-over bid for the shares of the target company, if for such compensation the maker of the offer acquired at least a 95 percent share in the target company carrying at least 95 percent of the voting rights in the company;

b) The compensation offered during the course of a voluntary take-over bid for the shares of the target company, if for such compensation the maker of the offer acquired at least a 95 percent share in the target company carrying at least 95 percent of the voting rights in the company, provided that the maker of the offer acquired at least 90 percent of the shares which were subject to the takeover bid, i.e. which were held by the minority shareholders;

c) The compensation which shall be determined according to the rules applicable to mandatory takeover bids; however, if an expert appraisal is to be used, it may not be older than three months before the date when it was published that the maker of the offer will exercise his right of squeeze-out.

Minority shareholders may always request that the maker of the offer provide an expert appraisal, in order to verify the adequacy of the compensation offered.

The adequacy of the compensation offered may be examined by a court if requested by a minority shareholder. The request for examination is to be submitted without undue delay, and no later than one month after the submission of the proposed agreement on the share purchase to the minority shareholder.

Should a court grant a different compensation than that stated in the agreement proposal to at least one minority shareholder, the maker of the offer shall grant such compensation to all the remaining minority shareholders as well, even if they have not submitted any such request.

A new legal regulation at the same time introduces "the right of sell out", which conversely gives the minority shareholders the right to force the majority shareholder to buy their shares, basically under the same principles that govern the right of squeeze out.

However, the new regulation has also raised several questions, such as whether it violates the Constitution, given that the squeeze-out may consist of a de facto expropriation of the assets of minority shareholders. It is therefore vital for minority shareholders that adequate mechanisms be established to review the conditions for exercising the right of squeeze-out, as well as the adequacy of any compensation proposed.


Rastislav Kuklis is an attorney with the Weinhold Legal law office in Bratislava.

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