Czech Republic: Squeeze-Out Legislation Amended

On June 3 2005 Act 216/2005 on the squeeze-out of minority shareholders of joint stock companies took effect (for further details please see "New Squeeze-Out Legislation by clicking on the 'Next Page' link at the bottom of this article). The new law gives controlling shareholders of Czech joint stock companies the option to squeeze out minority shareholders for reasonable monetary compensation. However, after the new law was introduced, it became the subject of criticism, especially from minority shareholders and the Securities Commission. The main complaint was that the rights of minority shareholders in obtaining adequate payment for their shares were not protected sufficiently in the squeeze-out process.

As a result, a new amendment altering the squeeze-out process was approved by the Chamber of Deputies on August 19 2005. The president signed the act on September 12 2005 and it will take effect on the day of its publication in the Collection of Laws.

Major Changes

Squeeze-outs will be subject to prior approval by the commission. The controlling shareholder must submit to the commission an expert opinion which verifies the adequacy of the compensation for minority shareholders. The commission will examine whether the compensation is adequate and will take into account the fact that minority shareholders are deprived of their right to decide whether to transfer their shares to the controlling shareholder.

Within 15 days the commission will:

• grant its consent to the expert opinion;

• request the controlling shareholder to alter the amount of compensation; or

• prohibit the squeeze-out.

The amendment also ensures that minority shareholders actually receive the compensation. The controlling shareholder must deposit money intended as compensation for the minority shareholders with a stockbroker or bank prior to the general meeting for deciding on the squeeze-out. The stockbroker or bank will disburse the compensation directly to the minority shareholders.

The new law on squeeze-out does not distinguish between listed and non-listed companies. Although the commission does not have any information on companies that are not listed, it must approve the expert opinions with respect to these companies.

According to the new Paragraph 5 of Section 183i of the act, Section 183e of the Commercial Code, which includes special provisions on the mandatory bids of listed companies, "should apply accordingly" in squeeze-out procedures. Section 183e includes provisions that are intended to protect the stable stock exchange price (ie, prohibition of insider trading), which appear to apply only to squeeze-outs in listed companies. However, the section also contains provisions on commission approval of compensation. These provisions apply to both listed and non-listed companies.

Implications for squeeze-out procedures in progress
The amendment does not provide transitional provisions with respect to squeeze-out procedures already in progress (transitional provisions had been proposed by the Senate, but were rejected by the Chamber of Deputies). This means that squeeze-outs will be subject to the amendment from when it comes into force. The biggest problems are expected to arise where a general meeting is convened without the commission's approval but takes place after the amendment comes into force. According to the amendment, the general meeting's resolution will be invalid due to failure to present the prior approval of the commission. If the general meeting takes place prior to the amendment coming into force, it should be valid pursuant to the retroactive prohibition principle. It is not clear whether the controlling shareholder will need to deposit compensation, which will not yet have been disbursed, with a stockbroker or a bank.

A further question arises as to whether the commission's approval needs to be granted before the controlling shareholder requests that the board of directors call a general meeting to approve the squeeze-out. Although the amendment is not explicit on this point, several provisions indicate that the commission's approval should be granted prior to this request and before convening the general meeting at the latest.

Although the new amendment leaves some questions unanswered, its effect is largely positive. In particular, obliging the controlling shareholder to deposit money intended as compensation for the minority shareholders with a stockbroker or bank prior to the general meeting for deciding on the squeeze-out improves the position of the minority shareholders significantly.

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.