Is a mechanism available to compulsorily acquire minority stakes?
Mergers & Acquisitions
There is one particular situation where the sale of shares is compulsory: following a go private MTO, if there are still free float shares representing less than five per cent of the company's capital stock, such shareholders can be squeezed out by the Company.
Section 103 of the Companies Act, provides that holders of 95% or more of the shares of a Company may compulsorily acquire the remainder. The principal difference between section 103 and section 102 is that a dissentient in s.103 can only apply to court to appraise the value of its shares. It cannot seek to vitiate the compulsory acquisition. The English case law on equivalent statutory provisions will be persuasive in Bermuda courts. English case law is such that a minority shareholder will find it very difficult to persuade the Court that on offer accepted by a majority of 95% is not reasonable and fair.
British Virgin Islands
BVI law provides for squeeze out provisions under section 176 of the Act in certain circumstances. Where an individual shareholder or shareholders acting in concert hold 90% of the votes of the issued shares in the target entitled to vote, section 176 provides that such shareholder(s) can instruct the target to redeem the remaining 10%, and the target shall so redeem the shares on the terms given by the majority shareholder(s). The majority shareholder(s) can use this power at any time and it applies irrespective of whether the shares are, by their terms, redeemable.
100% control can be achieved contractually under a merger, equity acquisition or upon the terms of a scheme of arrangement, each as described above. 100% control may also achieved by a bidder availing themselves of the statutory squeeze-out provisions as described above.
As far as we know, there is no mechanism available to compulsorily acquire minority stakes provided by Chinese related laws and regulations due to the concern of possibly violating the right of minority shareholders. However, if the minority shareholders have reached an agreement which stipulates the right in the nature of drag along with the acquirer, then the latter will have the right rendered by the contract to compulsorily acquire the shares held by the former and such agreement is not prohibited by law.
The Limited Liability Companies Act provides for a squeeze-out mechanism including both a right for the minority owners to sell and the majority owner to purchase minority shares in a company in case one shareholder’s ownership exceeds 90% of the shares and votes in the company.
Any majority shareholder owning 95% or more of the share capital in a German stock corporation has the statutory right to acquire minority shareholdings on a compulsory basis. The shareholders’ meeting of the target has to approve the squeeze out by a majority of the votes cast. The principal shareholder is allowed to vote on such a resolution. Prior to calling the meeting, the principal shareholder must prepare a detailed written report demonstrating that the conditions for a squeeze out have been met (i.e., that the principal shareholder owns 95% of the target) and detailing the evaluation methods that have been used to determine the cash compensation to be paid to the minority shareholders. This report must include an auditor's fairness opinion on the appropriateness of the evaluation methods and the adequacy of the compensation. The auditor is appointed by the court on the application of the principal shareholder. The compensation has to be paid in cash and must be "adequate" (according to the discounted future earnings analysis under the principles of the institute of German chartered accountants (IDW S1)); however, if the target is listed, the compensation must in principle not be less than the average weighted stock price in the three months immediately preceding the shareholder meeting resolving on the squeeze out. Following the approval by the shareholder meeting, the squeeze out is implemented by the registration of the resolution in the Commercial Register of the target, unless an action to set aside the resolution is filed by a minority shareholder (Anfechtungsklage).
Furthermore the adequacy of the compensation may be challenged in a special proceeding (Spruchverfahren). This proceeding does not prevent the registration in the commercial register and thus the effectiveness of the resolution.
Based on the European Takeover Directive, German law provides for another specific squeeze out procedure for listed companies following a successful takeover bid (in addition to the general squeeze out procedure). If the bidder holds at least 95% of the voting shares, it may apply for the transfer of the remaining voting shares by means of a court order. The application for the transfer by court order has to be filed within three months of the end of the acceptance period with the regional court of Frankfurt am Main.
If the controlling shareholder is organised as a stock corporation, partnership limited by shares (KGaA) or SE, a squeeze out procedure may also be initiated in a connection with a merger if the controlling shareholder owns 90% of the shares in the target. The squeeze out needs to be immediately followed by an upstream merger of the target into the controlling shareholder.
In accordance with Law 3461/2006 on takeover bids, when a bidder has acquired at least 90% of the voting rights of a target company, said bidder is afforded the right to demand to acquire the rest of the securities of the target company (squeeze out right). The bidder must announce its intention to use the aforementioned right and carry out the acquisitions within three months following the end of the acceptance period.
Furthermore, an offeror who holds, after the submission of the take-over bid, securities representing more than 90% of the total voting rights of the target company, is obliged for a period of three (3) months from the publication of the results of the take-over bid to acquire on-exchange all the securities that will be offered to such offeror by the remaining shareholders at a price that is equal to the consideration offered at the take-over bid. Such offer must publish this exit right of the shareholders at the time when the results of the take-over bid are published.
At the same time, Law 2190/1920 provides that if a shareholder acquired after the incorporation of the company and maintains at least 95% of the share capital, such majority shareholder may file a petition before the court to acquire the shares of the minority shareholder(s) for a consideration which must correspond to the real value of the shares. The First Instance Court of the registered seat of the company decides on the petition submitted by the majority shareholder and determines the applicable consideration provided that the specific conditions stipulated in article 49c of Law 2190/1920 are met.
Isle of Man
Both the 1931 Act and the 2006 Act contain provisions for the compulsory acquisition of shares from minority shareholders which apply to all takeover offers that constitute a scheme or contract (which expression includes a series of contracts) involving the transfer of shares to another person. If the bidder has had its offer approved within a specified period of time by not less than 90% in value of the shares affected the bidder may compulsorily acquire the remaining shares.
There is no bar on the shares owned by an affiliate of a bidder being taken into account when determining whether the 90 per cent threshold has been crossed.
Minority shareholders may under Norwegian law be subject to a squeeze-out. A majority shareholder or bidder that, directly or through subsidiaries, acquires shares in a company (both private (AS) and public (ASA)) that represent 90% or more of the total number of shares and votes can adopt a resolution by its own board of directors resolving to squeeze-out the remaining minority shareholders by a forced purchase at a redemption price. Each of the minority shareholders (holding less than 10%) has a corresponding right to demand that such majority shareholder (holding more than 90%) to acquire their minority shares. The rules and procedures for such compulsory acquisition procedure is set out in chapter 4 of the LLCA and the PLLCA.
The Guernsey Companies Law provides that if within 4 months of the date of an offer the offer has been approved or accepted by shareholders comprising not less than 90% in value of the shares subject to the offer, the offeror may, within a period of 2 months immediately after the last day on which the offer can be approved or accepted, give notice to any dissenting shareholder that it desires to acquire his shares (“notice to acquire”). Subject to the Court’s powers referred to in 25. above, on the expiration of 1 month from the date of the notice to acquire, the offeror must send a copy of the notice to the target and pay the necessary consideration for the dissenting shareholder’s shares, and the offeror shall then be registered as the holder of those shares.
For the purposes of calculating the 90% threshold, shares held as treasury shares and shares held by the offeror or its affiliates are not taken into account.
The person that acquires more than 95% of shares of a public joint-stock company or the person that was the sole shareholder of a reorganised (merged) company that became the holder of at least 95% of shares of the new public joint-stock company created as a result of such reorganisation, is entitled to demand buy-out of all the remaining shares of such public joint-stock company.
Squeeze outs are not possible – there is no mechanism through which bidders can compulsorily purchase the shares of minority shareholders.
Traditionally, the primary mechanism to compulsorily acquire minority stakes and cash-out minority shareholders was using “Shares Subject to Class-Wide Call”, but this is a time-consuming and complicated approach because it is always necessary for the target company to pass a shareholders resolution in order to amend the articles of incorporation to allow shares of common stock to be subject to the call provision under a Class-Wide Call, only after which the shares can be acquired. It also should be noted that in Japan, cash mergers and other corporate restructuring for cash are not used in practice because of the negative tax treatment of the target company.
A 2014 amendment to the Companies Act enabled buyers who have acquired more than 90% of the target's voting rights to require other shareholders to sell it their shares if the board of directors of the target company approve the sale. While the shareholding ratio requirement is stricter than for Shares Subject to Class-Wide Call, a shareholders’ meeting resolution is not required in this case, which can accelerate the squeeze-out process.
If the buyer holds less than 90% of the target company's voting rights, share consolidation can still achieve a squeeze-out of the remaining minority shareholders. In this method, the outstanding shares of the target company are reduced enough to make the shares held by minority shareholders fractional shares which can be extinguished by cash purchase pursuant to the Companies Act. The 2014 amendment to the Companies Act gave objecting shareholders an appraisal right, which made this method much more practical than before.
There is currently no squeeze out mechanism available in Thailand.
Under the Minority Shareholder Squeeze-Out Act the majority shareholder that directly or indirectly owns 90% of the shares in a limited liability company or a joint stock corporation can squeeze out the minority shareholders with a simple majority vote and the payment of fair compensation. The minority shareholders have no means to block the squeeze-out but can request a compensation review. If the articles of association of a company contain a provision regarding the amount of the compensation to be paid in case of a squeeze out, the contractual provision is not applicable in case the agreed amount is below fair value.
Regarding publicly listed companies, if the squeeze-out follows a public takeover offer not later than three months after the end of the offer period, there is a rebuttable presumption that the compensation is adequate if it is equal to the highest compensation that was paid during the offer period.
The articles of association can stipulate that a squeeze out pursuant to the Minority Shareholder Squeeze-Out Act is not permissible and that minority shareholders cannot be squeezed out.
As opposed to a compulsory acquisition of minority stakes, squeeze-out rights facilitate the acquisition by the bidder of the highest possible number of voting shares in the target company. Where the offeror holds shares representing not less than ninety percent of the voting rights in the company, or where, following acceptance of a bid, the offeror has acquired or firmly contracted to acquire securities representing at least ninety percent of the target’s capital carrying voting rights and ninety percent of the voting rights comprised in the bid, the offeror has the right to require remaining minority shareholders to sell him their securities at a price and shall take the same form as the consideration offered in the bid, or alternatively, in cash.
Squeeze-out right may only be exercised within three months at the end of the time allowed for acceptance of the bid.
Most states have short-form merger statutes that permit a majority shareholder that has obtained a certain percentage of a company’s stock (typically between 80-90%) to “squeeze out” minority shareholders by merging it with the parent without submitting the transaction to a shareholder vote. In addition to allowing short-form mergers, Delaware permits a buyer that has purchased in a tender offer a number of outstanding shares in the target that would otherwise be required to approve a merger (generally a majority, although the target company’s organisational documents may set a higher threshold) to consummate a merger with the target without submitting it to a shareholder vote, provided certain other conditions are met. Notably, this mechanism is not available in hostile takeovers, as there must be a merger agreement in place specifically contemplating the use of the specific statute that authorises it.
In the context of a mandatory public offer in relation to a public target company, where the mandatory public offer results in the purchaser holding 80% or more of the issued voting share capital, the remaining shareholders may (but are not obliged to) require the purchaser to continue to acquire up to 100% of the issued voting share capital on the same terms as the terms of the mandatory public offer.
There is, however, no Vietnamese law which compels any minority shareholders or members to sell their shares or equity interests to any majority shareholder or member.
The Companies Act 2001 provides that where an offer has been approved by of special resolutions of the target company’s shareholders, the minority shareholder who has voted against the offer may require the target company or a third party arranged by the target company to purchase his shares at a fair and reasonable price. The law does not provide for the compulsory acquisition of minority shares. However, in practice, minority shareholders opt for a buy-out.
In relation to listed GBCs and Reporting Issuers, an offeror, who has acquired 90% or more of the voting shares of the target company, may give notice to any dissenting shareholder that he intends to acquire the dissenting shareholder’s voting shares. The notice must be given within 28 days from the last day on which the offer shall be accepted. The offeror shall acquire the shares of the dissenting shareholder on the same terms as for the approving shareholders within 21 days of the issue of a notice. However, the offeror may not acquire these shares if the dissenting shareholder has made an application to the Supreme Court following the issue of the notice until the determination of such application.
The Companies (Jersey) Law 1991 (Companies Law) provides that, where a person (the Offeror) makes a takeover offer to acquire all of the shares (or all of the shares in any class) in a Jersey company (other than any shares already held by the Offeror at the date of the offer), if the Offeror has, by virtue of acceptance of the offer, acquired or contracted to acquire not less than 90 per cent in nominal value of the shares (or class of shares) to which the offer relates, the Offeror may (subject to the requirements of the Companies Law), by notice to the holders of the shares (or class of shares) to which the offer relates which the Offeror has not already acquired or contracted to acquire, compulsorily acquire those shares. A holder of any shares who receives a notice of compulsory acquisition may (within six weeks from the date on which such notice was given) apply to the Jersey court for an order that the Offeror not be entitled and bound to purchase the holder’s shares or that the Offeror purchase the holder’s shares on terms different to those of the offer.
In addition to the “squeeze-out” right of the majority shareholder, for the same scenarios mentioned at point 24 above, a minority shareholder of a listed joint-stock company has the right to determine the majority shareholder to buy its shares at a fair price.
If a buyer holds/controls more than 90% of voting rights in a code company, then it must notify the company, the Takeovers Panel and (if the company is listed) NZX, and:
- the buyer has the right to buy out the remaining shareholders; and
- the remaining shareholders have a right to sell their shares to the buyer.
The compulsory acquisition provisions in the Companies Act allow both a successful bidder to compulsorily acquire any outstanding shares, and minority shareholders to require the bidder to acquire their shares, subject, in either case, to certain conditions being satisfied. The provisions:
- enable a bidder, once it has acquired 90% (as regards both value and voting rights) of the independently held shares of a target, to compulsorily acquire the outstanding shares on the same terms as were set out in its offer; and
- enable a minority shareholder to force a bidder, when the bidder has acquired or agreed to acquire 90% (as regards both value and voting rights) or more of the shares of a target, to acquire his or her shares on the same terms, even if the offer has closed.
A shareholder who objects to his or her shares being compulsorily acquired has the right to apply to the Court for relief, but as noted above, such relief is rarely granted.
In the context of private mergers, minority shareholders will typically be obliged to comply with some form of compulsory transfer mechanism pursuant to the articles of association of the target company or any relevant shareholders' agreement.
Accordingly, it is generally the case that on such sales, the selling shareholder will be in a position to deliver 100% of the shares in the target company at closing.
With regards to listed companies, Spanish Act of the Stock Exchange Market (Ley del Mercado de Valores), stablish that, in those cases in which (i) the potential acquirer of the shares of a company performs a takeover bid (OPA) over the total of the company’s shares and as a result of it, acquires 90% of the share capital which provides voting rights and (ii) it is at the same time accepted by the holders of the shares representing the 90% of the voting rights; the acquirer and the holders of the shares of the company shall be entitled to require the offeror the purchase of their own shares at an equitable price.
On the other hand, with regards to non-listed companies, and according to the Spanish Companies Act (Ley de Sociedades de Capital), the compulsory right to acquire stakes from other shareholders is foreseen in very limited scenarios, and all them refers to a transfer of the company’s shares from a shareholder to a third party by any reason (inter vivos –e.g. by virtue of a sale and purchase agreement-, mortis causa –e.g. by way of an inheritance-, compulsory transfer – e.g. as a consequence of an expropriation by a public authority, etc).
In this regard, is quiet particular the situation stablished in article 348 bis of the Spanish Companies Act (Ley de Sociedades de Capital) which establishes the right of the shareholder to separate from the company if (i) during the five following years as from the incorporation date of the company, (ii) a shareholders have voted in favour to distribute dividends but (iii) the resolution have not been approved by the shareholders meeting. Nevertheless, such article have not been jet in force as its enforceability have been always been postponed. At this stage, such principle will enter in force on the January 1, 2017, but will not be strange if its enforceability as again postposed.
Finally, with regards to non-listed companies, it can be provided a drag along right which is a right that permits a majority shareholder to force a minority shareholder to join in the sale of its stake in the company. The aforementioned drag along use to be agreed in a shareholders agreement, and in many occasions can be included in the company’s by-laws.
The Turkish Commercial Code provides the following squeeze-out rights which can be applicable under certain conditions: (i) in case of a merger transaction, the companies participating to the merger can propose to a minority shareholder of the transferred company to exit the shareholding in consideration for an appropriate compensation, (ii) in a group of companies, the mother company holding at least 90% of the share capital of its subsidiary can purchase the shares of a minority shareholder in such subsidiary in case the minority shareholder prevents the company from conducting its business, does not act in good faith, creates noticeable disruption or acts in a careless manner and (iii) in case the minority shareholder(s) request(s) from the court the dissolution of the company on valid grounds, the court may decide that the shares of such minority be purchased by the company.
In case of listed companies, if the shares held by a shareholder acting alone or acting in concert with others reach 98% of the voting rights, the controlling shareholder can squeeze-out the minority shareholders (while the minority shareholders have the right to sell their shares to the controlling shareholder).