On June 3 2005, the right of the majority shareholder of a joint-stock company to force minority shareholders to sell their shares (squeeze-out) was implemented into Czech law. Unlike the Directive 2004/25/EC on Takeover Bids, the Czech squeeze-out regime does not require the squeeze-out to be preceded by a takeover bid. Also, the right to squeeze-out may be exercised both in listed and unlisted companies. Lastly, the corresponding right of the minority shareholders to force the majority shareholder to buy their shares (sell-out) was not implemented.
The right to squeeze-out is available to a majority shareholder holding at least 90% of shares of a Czech joint-stock company. This shareholder has the right to request the board of directors to call a shareholders meeting to decide on the squeeze-out of the minority shareholders. After the shareholders meeting passes the decision on the squeeze-out, the board of directors files an application to register the squeeze-out decision in the Commercial Register. The forced transfer of the shares becomes effective one month from the publication of the registration court's notice that the squeeze-out decision has been registered. The majority shareholder must pay the minority shareholders a fair compensation for their shares, which will be determined by an expert.
The aim of the Czech squeeze-out law was to liberate companies from hundreds of small shareholders who acquired their participations by way of the coupon privatization in the early 1990s. The fragmented shareholding structure of the companies was seen as an obstacle to their proper administration.
On September 30 2005, an amendment of the squeeze-out law beefed up protections for minority shareholders. First, the fair price for their shares, determined by the expert, must be approved by the Czech National Bank. Second, the majority shareholder must deposit with a bank or a stockbroker in advance the cash required for the payment for the shares.
The majority shareholder must exercise the squeeze-out right no later than three months from the day the 90% shareholding was acquired otherwise the right expires. However, the three-month period runs anew after the shareholding has been transferred within the group, that is, this restriction can be easily bypassed.
The enactment of the squeeze-out law triggered a wave of squeeze-outs in 2005. As of the end of September 2005, 201 companies had completed squeeze-outs. As of March 2006, 216 companies have completed squeeze-outs, at the total cost to the majority shareholders of Kc9 billion ($400 million).
Soon after its enactment, the squeeze-out law became the subject matter of political and legal dispute. Numerous squeeze-outs have been challenged in courts by minority shareholders, who claimed a violation of their constitutional rights (expropriation). Judges at the registration courts started to sabotage squeeze-outs to avoid responsibility for the expropriations. Claimants argued that the expert who determines the fair price of the shares should be appointed by an independent court and not by the majority shareholder. In November 2005, a group of senators submitted a complaint to the Czech Constitutional Court against the squeeze-out law.
While the courts deliberate the complaints, there have been far fewer squeeze-outs in 2006. The outcome of the pending litigation is uncertain. It is believed that once a squeeze-out is registered, there is no way for the minority shareholders to claim their shares back.
But for the time being, the Czech squeeze-out regime remains available as a unique tool for concentrating share ownership in Czech joint stock companies.
Pavel Marc and Vladislava Lisková