Originally published July 2005
On June 3 2005 Act 216/2005 on the squeeze-out of minority shareholders of joint stock companies took effect. This new law gives majority shareholders of Czech joint stock companies the option of squeezing out minority shareholders against payment of adequate monetary compensation. This will promote greater flexibility in the corporate life of the company as administratively demanding general meetings are no longer required. After a squeeze-out, minority shareholders are no longer able to jeopardize decisions of general meetings. Upon publication of the resolution of the general meeting, listed shares are delisted, eliminating the need to fulfil notification obligations towards the security exchanges and thus further reducing administrative costs.
However, current majority shareholders have the right to squeeze out minority shareholders only until September 3 2005.
The act introduces into the Czech Commercial Code a genuine squeeze-out procedure that gives a shareholder with shares representing at least 90% of the registered capital or 90% of voting rights (the 'controlling shareholder') in a company the right to enforce the transfer of the shares of the other shareholders to the controlling shareholder in return for fair compensation. The new provisions have been introduced as Sections 183i to 183n of the code.
Shareholders that were already controlling shareholders on June 3 2005 may exercise the squeeze-out right only within three months of the new law taking effect. Failure to observe this deadline will mean missing a unique opportunity to become a sole shareholder under the new legislation.
Changes Made by New Regulation
Under the old squeeze-out regulation (which actually still exists as an option), and as set out in Section 220p of the code, the controlling shareholder can impose upon the general meeting a decision about the transfer of the company's assets to the controlling shareholder. The company is wound up without liquidation. The minority shareholders are entitled to adequate financial compensation, which must be based on an expert opinion delivered by an expert nominated by the court. The main disadvantage of this method of squeezing out the minority shareholders is that the company would be wound up. The new act presents the alternative of allowing the controlling shareholder to squeeze out the minority shareholders without winding up the company.
The squeeze-out process consists of the following steps:
- The controlling shareholder requests that the board of directors call a general meeting to approve the squeeze-out. An expert opinion to determine the compensation for the minority shareholders must be attached to the request. The expert is chosen by the controlling shareholder.
- The board of directors shall convene the general meeting within 15 days of the receipt of the request of the controlling shareholder. The invitation to the general meeting shall also contain a statement of the board as to whether it considers the amount of compensation to be adequate.
- Once they have received the invitation to the general meeting, the minority shareholders may request that the court review the adequacy of the compensation. This right ceases within one month of the publication in the Commercial Bulletin of the entry of the general meeting's resolution in the Czech Commercial Register.
- With a 90% majority the controlling shareholder cannot be overruled by the minority shareholders, so the squeeze-out resolution must be approved.
- The board must then file for the registration of the general meeting's resolution in the Commercial Register.
- Upon publication of the resolution of the general meeting, the listed shares shall be delisted.
- One month after the registration of the general meeting's resolution and upon publication of the registration, the ownership right to the shares of the minority shareholders automatically passes to the controlling shareholder.
- Minority shareholders should receive compensation for their shares immediately, but no later than within two months of the day on which these shares are transferred from their account in the Securities Centre (if it fails to ensure the payment of such compensation, the majority shareholder shall be temporarily prohibited from exercising the voting rights attached to the shares that were not duly paid for).
The act leaves a lot of questions open. The most pressing questions regarding the new provisions are considered below.
- What must an existing controlling shareholder do within the three-month window of opportunity in order to be able to exercise his or her right in a timely manner? The general meeting should be held on a date that allows the board to file the entry of the resolution in the Commercial Register before September 3 2005, even though it would be sufficient to hold the general meeting at any time before September 3 2005.
- How long is the period between the invitation being sent out and the general meeting taking place? According to the current prevailing view, the period cannot be reduced. Therefore, the general meeting cannot take place earlier than 30 days after the invitation has been sent out or published.
- What must the board do in order to comply with the requirement that it act with the care of a prudent businessperson when establishing whether the controlling shareholder's suggestion for compensation is adequate? As the board must publish the invitation to the general meeting within 15 days of receiving the request, there is not enough time to carry out a full independent valuation (and potentially a tender for the selection of the independent adviser). However, a plausibility check by, for example, the company's current auditors should be sufficient. This plausibility check should verify the numbers used and the valuation method applied. It is advisable to have the plausibility check carried out by an independent party (eg, if the controlling shareholder has used the company's auditors for the initial valuation, a different expert should then be used).
Since coming into effect the act has attracted criticism, mainly from minority shareholders and the Czech Securities and Exchange Commission. The main arguments against the act are that: (i) there are insufficient sanctions and other instruments in place to ensure that payment of compensation to the minority shareholders actually occurs; and (ii) it is unsatisfactory that the expert who determines the compensation is chosen by the controlling shareholder. Once a further amendment to the code, which was recently approved by the Chamber of Deputies, comes into force, the controlling shareholder will have to have secure the approval of the Securities and Exchange Commission for the compensation offered for the minority shareholders' shares prior to the shareholders' general meeting. Moreover, the controlling shareholder will also have to deposit the money intended as compensation for minority shareholders with a broker or a bank prior to the general meeting. However, before this amendment is enacted, it must be passed by the Senate and signed by the president.
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.