Since January 1 2002, the purchaser of at least 30% of the stated capital of a listed German stock corporation has been obliged to submit an offer to the remaining shareholders to acquire their shares. Since January 1 2002, if a purchaser owns at least 95% of the stated capital, the German Stock Corporation Act offers the possibility of squeezing out the minority shareholders by way of a resolution of the general meeting on payment of an adequate cash compensation.
If the purchaser acquires at least 95% of the stated capital and if he has the intention at the time of the purchase to squeeze out the minority shareholders of the target company, the question arises whether he can be granted an exemption from making a mandatory bid by the competent German Federal Financial Supervisory Authority (BAFin) to initiate the squeeze-out procedure immediately. This avoids the considerable costs involved in submitting a mandatory bid and initiating the squeeze-out three to four months earlier.
Exemption from a mandatory bid is in the discretion of the BAFin to the extent it appears to be justified. BAFin considers the manner in which control of the target is gained and the interests of the purchaser and the remaining shareholders of the target company. But in a recently published newspaper article BAFin officials stated that an exemption would only be granted in exceptional cases. Therefore, the purchaser of at least 95% of a target company would in principle be obliged to first make a mandatory bid before he can initiate the squeeze-out of the remaining shareholders. This opinion is based on the different protective functions of the two procedures.
In a mandatory bid, the minority shareholders are free to decide if they wish to remain shareholders of a company that in future will be controlled by a new controlling shareholder, or if they want to exit from the company if they are paid the bid price. But the protection of the freedom of decision of the minority shareholders is no longer required in the event a shareholder acquires an interest of at least 95% in the company, since the minority shareholders can be squeezed out a few months later. The decisive difference in the level of protection of the economic interests of the minority shareholders is that in the case of a mandatory bid, prior share purchases in a three-month period and subsequent share purchases within a one-year period must be taken into consideration when the bidder calculates the amount of compensation it will pay to the minority shareholders. No corresponding obligation applies to squeeze-out procedures. This could easily be counterbalanced by the BAFin making the exemption dependent on the new controlling shareholder undertaking to comply with these price regulations prescribed by the Takeover Act in the squeeze-out procedure. But, in the newspaper article, BAFin officials argued that, in doing so, BAFin would be intervening in a procedure outside of its area of competence. This argument is unpersuasive, since in other exemption cases such as restructurings, it is the task of the BAFin to supervise and ensure compliance with requirements, intervene in other proceedings if necessary. In addition, BAFin officials have objected that, in a mandatory bid, shareholders receive their consideration a few weeks after control is gained, whereas it is in the discretion of the new controlling shareholder as to when he initiates the squeeze-out. This is also unconvincing, as BAFin could of course grant the exemption linked to a time limit within which the new controlling shareholder would have to initiate the squeeze-out procedure.
Nevertheless, purchasers of listed companies should be prepared for the BAFin to grant an exemption from the mandatory bid only as a special exception even if they acquire more than 95% of the stated capital of the company. According to the newspaper article, this might be the case in the absence of sufficient share trading volume, if the number of minority shareholders is extremely low and if the previous controlling shareholder already owned more than 95% of the shares, so that the minority shareholders had been facing the risk of a squeeze-out already before the change of control. Giving the above reasons, the BAFin has apparently granted exemptions from the mandatory bid only once since the new Takeover Act took effect on January1 2002. In light of this restrictive practice, sellers of listed companies with a low number of shares in free float are recommended to squeeze out the minority shareholders before the sale so as to render the purchase more attractive. This applies particularly in cases in which shares are also contemplated to be sold to private equity investors because they usually have no intention of running a company with a low number of shares in free float.
Heiner Drüke and Arnold Büssemaker
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