Squeeze-out in public companies – compulsory buy-out of share

The key factor is therefore the majority of votes and not the number of shares held by the majority shareholder. Importantly, the acquisition of shares as a result of a squeeze-out takes place without the consent of the shareholder to whom the squeeze-out request is addressed.

The possibility to exercise the right to request a squeeze-out is limited in time. The time limit for exercising this right is 3 months from the date on which the shareholder making the buyout reaches or exceeds the aforementioned threshold of 95% of the total number of votes in the Company.

The squeeze-out procedure for minority shareholders begins with the conclusion of an agreement between the squeeze-out shareholder and the brokerage institution acting as intermediary in the squeeze-out.

The intermediary shall simultaneously notify the Financial Supervision Authority and the company operating the regulated market of its intention to announce the squeeze-out[1]. The notification should, in particular, contain information on who will buy out the minority shareholders’ shares and for what amount. Both the Financial Supervision Authority and the company operating the regulated market may comment on the planned transaction.

The redeeming shareholder then establishes collateral in the amount of at least 100% of the value of the shares to be redeemed. The establishment of this collateral must be documented by a certificate from the bank or other financial institution providing the collateral. Subsequently, the brokerage house intermediating in the compulsory purchase transaction shall announce – by means of at least one information agency and publication in at least one nationwide daily newspaper – the intention to purchase shares through a compulsory purchase, together with information on the compulsory purchase. On the day of the announcement of the information on the compulsory purchase of shares, the entity acting as an intermediary in the execution of such purchase shall submit to the National Depository for Securities S.A. an instruction for the transfer of the purchased shares.

In the case when the subject of the compulsory buyout are dematerialised shares , the buyout takes place through an entry of these shares on the securities account of the buyout party in exchange for the payment of the buyout price. On the other hand, where the buy-out concerns shares in certificated form, the transfer thereof shall take place through the issue of share documents in exchange for payment of the buy-out price.

As the buyout of shares takes place independently of the will of the buyout shareholders, the rules for determining the price for these shares have been defined by the legislator. The mechanism for determining the squeeze-out price is set out in the provisions of the Public Offering Act[2]. When determining the squeeze-out price, regulations analogous to those for calculating the share price in calls for subscription for the sale or exchange of shares of public companies apply.

It follows from the above that the price of shares subject to squeeze-out shall:

• must not be lower than the average market price over the six months preceding the date of the notification of the buyout request,
• may not be lower than the highest price that the entity making the announcement of the squeeze-out, its subsidiaries or parent entities as well as the entities being a party to the agreement[2], paid for the shares being the subject of the squeeze-out during the 12 months preceding the announcement of the squeeze-out or issued for the shares being the subject of the squeeze-out during the 12 months preceding the announcement of the squeeze-out ,
• must not be lower than the average market price over a period of 3 months of trading in these shares on the regulated market preceding the announcement of the tender offer
• if it is not possible to determine the price on the basis of the aforementioned criteria, the fair value of the shares is a secondary criterion.

The compulsory buy-out procedure for shares in public companies is highly controversial. First of all, it is indicated that the mechanism of valuation of shares subject to squeeze-out provided by the legislator appears to be incorrect.

As already mentioned above, the regulations concerning the calculation of the share price in calls to subscribe for the sale or exchange of shares in public companies apply to the valuation of shares subject to squeeze-out. It is noteworthy that in the case of calls to subscribe for the sale or exchange of shares in public companies, these companies have a more dispersed shareholding (higher free float) than the companies in which the squeeze-out procedure is carried out.

The Constitutional Court, when analysing the admissibility of the procedure of compulsory buyout of shares in non-public companies,[4] pointed out that in the case in question we are dealing with consequences of deprivation of property, similar to expropriation. Consequently, the Constitutional Court held that the “squeezing out” of a minority shareholder should take place only with just compensation. In the opinion of the Constitutional Court, just compensation – is fair compensation. This compensation should give the owner the opportunity to recreate the thing he has lost, or, more broadly, it should allow the expropriated person to recreate his property situation as it was before the expropriation. Compensation must not be depleted in any way, and not only by the way it is calculated, but also by the mode of payment.

The arguments presented above raise reasonable doubts as to whether the “expropriation” of a minority shareholder of a public company occurs in accordance with constitutional standards, i.e. with just compensation.

Another issue that raises serious reservations is the fact that minority shareholders subject to a squeeze-out procedure are deprived of the possibility of a judicial review of the price at which the squeeze-out takes place .

In the case of compulsory buyout of shares, minority shareholders of non-public companies have the possibility to challenge a resolution of the general meeting on compulsory buyout of shares before a court. In the course of the proceedings brought against the resolution, minority shareholders of non-public companies have the possibility to challenge the squeeze-out price. In the course of these proceedings, shareholders may also raise a demand for an assessment of the rationale of the conduct of the buy-out from the point of view of substantive grounds, including the motives for the compulsory buy-out. Indeed, these motives must not result from an abuse of the majority right against minority shareholders. In addition, shareholders of non-public companies also have the possibility to resolve the results of the valuation of the shares subject to the buyout before the court of registration.

However, the law does not provide such protection for “squeezed out” shareholders of public companies , as in the case of these companies the General Meeting does not pass a resolution on the compulsory buyout. Thus, minority shareholders of non-public companies – unlike shareholders of public companies – do not have the statutory possibility to verify the buyout price presented to them. Likewise, the law does not provide instruments to examine the legitimacy of the compulsory buyout from the point of view of the material premises and its motives.

As a consequence, shareholders of public companies who are not satisfied with the terms of the compulsory buy-out procedure carried out (e.g. they believe that the price at which the buy-out was carried out was too low) are forced to seek other means of protecting their rights, e.g. directing claims for damages against the ‘buy-out’ shareholders for incorrectly determining the buy-out price.

[1] If the shares are listed on several regulated markets, the notice must be addressed to all the operators of those markets.

[2] The full name of the legal act – the Act on Public Offering and the Conditions for Introducing Financial Instruments to the Organised Trading System and on Public Companies of 29 July 2005, (Journal of Laws of 2019, item 623).

[3] referred to in Article 87(1)(5) of the Public Offering Act.

[4] Judgment of the Constitutional Tribunal of 21 June 2005, ref. P 25/02