A new law on the squeeze-out of minority shareholders has been enacted and introduced into Slovak law as of January 1 2007 (Slovak legal terminology recognizes squeeze-out as the right of buyout).

Act 644/2006 Coll amending and supplementing the Act on Banks and Act on Securities and Investment Services (the Amendment) implements into the Slovak legislation several directives of the European Parliament and of the Council, including the Takeover Directive, which should harmonize the conditions of takeovers within the EU.

The Amendment introduces changes to the Act on Securities and Investment Services (the Securities Act), related particularly to the contractual pledge over securities, the activities of stock brokerage companies and the adequacy of their own funds. The most extensive changes were introduced in the section concerning takeover bids. The Amendment specifies and stipulates the conditions, duties and procedures regarding execution of takeovers, and the squeeze-out and sell-out regimes.

Article 15 of the Takeover Directive stipulates that the member states must ensure that a majority shareholder is able to require all the holders of the remaining securities to sell it those securities at a fair price under the conditions determined by the Takeover Directive.

By introducing the squeeze-out regime, the Amendment provides the legal basis for buying out minority shareholders. The squeeze-out regime enables majority shareholders to acquire all the remaining securities of the target company admitted to trading on a regulated market in Slovakia or in another member state for adequate compensation, regardless of the potential disagreement of the minority shareholders.

To this right of buyout of the majority shareholders corresponds the obligation of the minority shareholders to sell their securities, provided the conditions stipulated by law are met.

Previous regulation

The squeeze-out regime has not yet been regulated in Slovakia, although the respective legislation governing the right of squeeze-out was adopted in the neighbouring Czech Republic in 2005.

The missing legal framework has led to unconventional practices and semi-legal techniques to reach the same or similar results, such as changing the legal form of a company from a joint stock company to a cooperative to exclude minority shareholders. In such cases, the minority shareholders become members of the cooperative and must pay a cooperative membership fee, which is often set too high for them to pay. Unable to do so, they are expelled from the cooperative and they are entitled to a settlement payment. However, the protection of these minority shareholders is not sufficiently ensured and adequate compensation is not guaranteed.

Purpose of the squeeze-out regime

According to the Amendment's explanatory report, the purpose of the squeeze-out regime is to react to the radical changes in the ownership structure of the company. The joint stock companies burdened with fragmentation of their ownership structure resulting from the first wave of privatization may apply the right of squeeze-out to concentrate their ownership structure. The fragmentized ownership structure leads to the majority of shares being held by one majority shareholder, but the functionality of the internal mechanism is limited. Convening shareholders' meetings, meeting information obligations, and other duties stipulated by law towards shareholders constitute a burden that could create losses for the company and also for the shareholders. On the other hand, minority shareholders have a certain level of insider control in the company.

The Ministry of Finance of the Slovak Republic has declared the measure reflects the concentration of ownership in Slovak companies into the hands of single majority investors, which has led to a decline in turnover on the Bratislava stock exchange. The squeeze-out regime will allow them to work more efficiently by cutting transaction costs and the costs of meeting legal requirements. The squeeze-out regime might also help to improve and simplify the administration of the target company, especially when convening and organizing shareholders' meeting and their decision-making.

Justification of the squeeze-out regime also rests on the limited opportunities for minority shareholders to affect the decision-making of the company. However, the minority shareholders also have rights guaranteed by law that can be misused to gain benefits that disproportional to their interests. The majority shareholder's incentives for long-term value creation are threatened. The minority shareholders often put pressure on the majority shareholder to reach short-term goals.

The change of the Slovak legislation will allow foreign investors (such as Mol Rt, which holds more than 98.41% in the refiner Slovnaft, and investors in some Slovak banks such as Intesa Holding International, which holds 96.5% in VUB, and OTP Bank Rt, which holds 97.23% in OTP Banka) to gain full ownership of their Slovak units. The squeeze-out regime could increase the number and speed of takeovers and attract more foreign investors to Slovakia.

Squeeze-out conditions

The offerer has the right to require all remaining shareholders of the target company to transfer to it their shares for a adequate consideration, provided that:

1. The majority shareholder has launched a mandatory or voluntary takeover bid announced after January 1 2007.
2. The bid has not been partial (that is, it has not applied only to acquisition of a part of the remaining shares held by minority shareholders), and it has not been conditional (that is, the offer has not stipulated a condition of a minimum number of shares that the majority shareholder has committed to buy).
3. The majority shareholder holds the shares representing at least 95% of the share capital of the target company, to which at least 95% of the voting rights in the target company are related.
4. The majority shareholder has exercised the right of buyout within three months after the time for accepting the takeover bid has expired.

The majority shareholder's stake in voting rights attached to the shares of the target company will be determined as the ratio of the sum of nominal values of the shares held by an individual or a legal entity to the sum of nominal values of all shares of the target company carrying voting rights. A voting right attached to an interim certificate admitted to trading on a regulated market with listed shares is deemed to be a voting right attached to a share, which the interim certificate represents.

The majority shareholder's stake in shares of the target company carrying voting rights will be increased by voting rights that:

1. the majority shareholder is authorized to exercise in its own name, but for the account of their holder;
2. are held by a third person with which the majority shareholder concluded a written contract committing them to exercise permanent joint influence on the target company's management through joint execution of their respective voting rights;
3. are exercised by a shareholder as instructed by, and for the benefit of, the majority shareholder under an agreement on the exercise of voting rights;
4. the majority shareholder or a person mentioned in (a) to (c) may acquire in accordance with a contract on the basis of a unilateral expression of will;
5. the majority shareholder is entitled to exercise, based on a contract on administration or safekeeping of securities, or portfolio management, provided that it was not given any instructions by the shareholder as to how to exercise the voting rights.

The above mentioned stake of the majority shareholder in shares of the target company carrying voting rights will be decreased by voting rights that:

1. the majority shareholder is authorized to exercise for the account of a person other than a person directly or indirectly controlled by the majority shareholder or person controlling the majority shareholder;
2. another person is authorized to exercise based on a contract on administration or safekeeping of shares, or a portfolio management contract, provided that it is not bound by instructions of the majority shareholder.

Definition of the terms

A takeover bid is a public offer for the conclusion of an agreement, made by an offerer to the shareholders of the target company and announced voluntarily (a voluntary takeover bid) or on the basis of the duty stipulated by the Securities Act (a mandatory takeover bid), which follows or has as its objective the acquisition of a controlling interest in the target company. The subject matter of the public offer is a purchase of all shares of a target company or part of them, or an exchange of these shares or their part for other securities. The takeover bid may be carried out only on the regulated market.

The target company is a company whose shares are the subject of a takeover bid.

The provisions on takeover bids refer only to shares, interim certificates, and other transferable securities, to which the voting rights are attached, traded on a regulated market (and on the regulated free market) in the Slovak republic or in another member state.

For the purpose of a takeover bid, an interest is presumed to be controlling if 33% of the voting rights attached to the shares of a target company is held by an individual or a legal entity.

An individual or legal entity acting in concert, whose stake in the voting rights exceeds 33%, 50%, or 66% of all voting rights, are obligated to make a takeover bid to buy all listed shares of a joint stock company (a mandatory takeover bid).

Persons acting in concert are individuals or legal entities who cooperate with the majority shareholder or the target company on the basis of an oral or written agreement, either express or tacit, aimed either at acquiring controlling interest in the target company or at frustrating the successful result of a takeover bid.

Squeeze-out procedure

The majority shareholder who intends to apply the right of buyout must notify without undue delay its decision, including the proof of the circumstances under which its right arose, to the target company, to the National Bank of Slovakia (the NBS) and to all remaining shareholders. For this purpose the central depository of securities will provide the list of the target company's shareholders and of their pledges to the majority shareholder upon request. The right of buyout will be effective towards the respective minority shareholders only once NBS approval is granted, whereas the NBS may only grant its approval if all the conditions for squeeze-out are met.

The NBS must decide on approval or rejection of the exercise of the right of buyout within 10 working days from the day of receiving the application for the approval.

The majority shareholder can apply the right of buyout towards minority shareholders simultaneously with filing an application for NBS approval, provided they deliver the draft share purchase agreement or draft agreement on their exchange for other securities, together with a notice that the right of buyout has been made conditional on NBS approval.

The majority shareholder must exercise the right of buyout within three months after the takeover validity period expires, otherwise the right becomes invalid. To apply this right, the majority shareholder must deliver the draft agreement to all the minority shareholders. The draft agreement must contain the following data:

• Compensation for the shares of the target company and explanation of the amount of the compensation; if the subject matter of the agreement is a purchase of the shares, the purchase price a share should be indicated; if the subject matter of the agreement is an exchange of the shares for other securities, the number of securities, their nominal value, form and resemblance should be indicated.
• The period for accepting the takeover bid.
• The period and procedure for effecting the transfer of the securities.

The minority shareholders must accept the draft agreement within the time period set in the draft, or within 10 working days after approval is granted by the NBS. Should the minority shareholders not accept the draft agreement within the stated time period, the majority shareholder may request the court to replace their acceptance with a judicial decision. The majority shareholder must exercise this right within three months after the expiration of the period set for acceptance of the agreement, otherwise the right becomes extinct.

The board of directors of the target company is obliged to cooperate with the majority shareholder in the manner necessary for performing the share transfer.

Adequate compensation

The minority shareholders should receive adequate compensation (a fair price) for their shares. This compensation may take the form of money, securities or a combination of both. When securities are offered as compensation, the majority shareholder must also offer a cash option. The minority shareholder is not entitled to block the execution of the squeeze-out right, but has the right to a judicial review of the accuracy of the compensation offered.

The compensation for shares must be adequate. The criteria for adequacy are the minimum criteria. The compensation will be regarded as adequate if it equals at least one of the following amounts:

1. The compensation, for which the majority shareholder acquired shares representing at least a 95% of stake in the share capital of the target company carrying at least 95% of the voting rights in the target company on the basis of the mandatory takeover bid for the shares of the target company.
2. The compensation offered on the basis of a voluntary takeover bid for the shares of the target company is always presumed to be adequate if for such compensation the majority shareholder acquired shares representing at least a 95% of stake in the share capital of the target company carrying at least 95% of the voting rights in the target company, provided that the majority shareholder acquired at least 90% of the shares that were subject to the takeover bid.
3. The compensation that will be determined according to the rules applicable to mandatory takeover bids if the majority shareholder did not acquire on the basis of voluntary takeover bid at least 90% of the shares that were subject to the takeover bid. The amount of the compensation may not be simultaneously lower than:
4. 1. the highest compensation provided for the shares of the target company by the majority shareholder or person acting in concert over the 12 months before the duty to announce the mandatory takeover bid arose; and
   2. the compensation determined by an expert appraisal, although it may not be older than three months from the date of publishing the notification on exercise of the right of buyout. An expert will be chosen by the NBS from the list kept under the special law; and
   3. the net business assets per share value (equity per share value) including the intellectual property value indicated in the last authorized financial statements verified by an auditor before the duty to announce the mandatory takeover bid arose; and
   4. if the shares are listed, the average share price on the stock exchange over the 12 months before the duty to announce the mandatory takeover bid arose.

The majority shareholder is always obliged to provide an expert appraisal on the request of minority shareholder to verify the accuracy of the compensation offered. The court, if so requested by the minority shareholder, may review the accuracy of the compensation offered. The request for examination should be submitted without undue delay, but no later than one month after the delivery of the draft agreement to the minority shareholder, otherwise this right expires. Should the court adjudge a different amount of the compensation than that stated in the draft agreement to at least one minority shareholder, the majority shareholder must provide that compensation to all other remaining minority shareholders. If the amount of the compensation has not been determined by an expert appraisal, burden of proof must be born by the majority shareholder.

Right of sell out

The Amendment also introduces into Slovak legislation the right of sell out, which provides the minority shareholders with a reciprocal right to require the majority shareholder to buy their shares for the adequate compensation upon its stake reaching the threshold stipulated by law. Basically the same principles governing the right of buyout apply to the right of sell out.

The majority shareholder must accept the draft agreement within the stipulated or agreed upon period, otherwise the decision of the majority shareholder will be replaced on the request of the minority shareholder by the court ruling. The provisions on the right of sell out will apply accordingly.

Questionability

The member states had until May 20 2006 to implement the squeeze-out regime into national legislation.

Its constitutional conformity is often questioned, because the squeeze-out regime is regarded as an encroachment on the minority shareholders' rights of property. It could constitute a certain form of expropriation of minority shareholders and so requires an objective justification. The right of property is protected by the constitution of the Slovak Republic. A limitation of the right of property or an expropriation is only allowed under the conditions stipulated by law. The public interest is required. According to the explanatory report to the Amendment, the public interest lies in competitive ownership structures of the companies, administration and control mechanisms that can be implemented more easily without minority shareholders.

A potential decision of the Constitutional Court of the Slovak Republic could increase pressure to amend the Constitution of the Slovak Republic subject to the obligation of the member states to introduce the squeeze-out regime into national legislation by transposition of the Takeover Directive.

Doubts on the constitutional conformity of the squeeze-out regime have also arisen in other member states and the response sounds on existing public interests in the event of exercising the right of buyout.

However, a real protection of minority shareholders' rights depends on the establishment of adequate functional mechanisms to review the fulfilment of the conditions for applying the right of squeeze-out, as also for examination of the adequacy of compensation.

Author biographies

Karol Siska CHSH Siska & Partners Cerha Hempel Spiegelfeld Hlawati Karol Siska has been a Slovak partner of CHSH Cerha Hempel Spiegelfeld Hlawati Partnerschaft von Rechtsanwälten since May 2006. His main areas of practice are banking and finance, commercial, administrative business law, competition and cartel law and EC law. Siska graduated from the Law Faculty of Comenius University in Bratislava (Mgr, 1987, and JUDr, 1989). Before becoming a partner of CHSH he was an attorney and founder of Siska & Partners and was a legal affairs manager of Bank Austria from 1995 to 1997. Lucia Tadlánková CHSH Siska & Partners Cerha Hempel Spiegelfeld Hlawati Lucia Tadlánková is a member of Siska & Partners CHSH Bratislava and has been with the firm since October 2006. Her main areas are commercial/corporate law, M&A transactions and contract law. Tadlánková graduated from the Law Faculty of Comenius University in Bratislava in 2006. She finished her studies at the Faculty of Business Management of the University of Economics in 2005.