New case law regarding a squeeze – out procedure
On 21st July, 2011 the Supreme Court of Lithuania has adopt a ruling in a civil case No. 3K-3-332/2011 concerning a suspension of a squeeze-out procedure in case of dispute regarding the price. A case law in the area of squeeze-out procedure is particularly sparse. The courts are only beginning to develop it.
Purpose of squeeze-out and sell-out procedures
Article 37 of the Law on Securities of Republic of Lithuania foresees that the shareholder owning not less than 95 percent of the total voting rights of the company shall have a right to require the remaining minority shareholders to sell their shares (squeeze-out rule). Squeeze-out rule is primarily designed to protect rights of majority shareholders: minority shareholders may disturb normal business activity of the company by abusing their rights. Also the continued presence of minority shareholders can be costly for the bidder, for instance, the bidder cannot fully integrate the acquired company with the activities and organization of his existing companies. Therefore the squeeze-out rule allows majority shareholders to protect themselves from disproportionately high cost of protection of the rights of minority shareholders.
On another hand, sell-out rule, also established in the Law on Securities, is designed to protect the rights of minority shareholders: minority shareholders have a right to require that the majority shareholder owning not less that 95 percent of the total voting rights of the company would purchase their shares and majority shareholder is obligated to buy-up the shares owned by minority shareholders. The necessity of this rule is explained by the fact that after a takeover, the majority shareholder may abuse his dominant position, or in corporate finance parlance, extract private benefits at the expense of the minority shareholders. Furthermore, the market for shares becomes very illiquid in such situations, preventing minority shareholders an exit at a “fair price”.
The price offered for the shares shall be established in accordance with the principles laid down in the Law on Securities and approved in advance by the Lithuanian Securities Commission (LSC).
The “fair price” of the shares often becomes the object of a dispute between the parties – most of squeeze-out procedures end up in court disputes regarding establishment of the fair price. In most cases courts have satisfied the requirements of the minority shareholders: (i) in case of squeeze-out of SEB bank shares, the court has satisfied the minority shareholders’ claim and raised the squeeze-out price to LTL 356 for one ordinary share; In case of Lietuvos elektrinė, AB the court has also satisfied the minority shareholders’ claim and established a squeeze-out price equal to LTL 7,48; the dispute regarding squeeze-out price of Lifosa, AB is still pending.
Frequent disputes regarding establishment of the price of squeeze-out indicate that minority shareholders know their rights and seek to sell their price at fair price determined by the qualified business assessors taking into account all the relevant factors that may affect the fair value of the shares.
Suspension of the squeeze-out procedure in case of dispute on the share price
The paragraph 10 of the Article 37 of the Law on Securities stipulates that within 90 days from the date of an announcement about squeeze-out in the source specified in the Articles of Association of the company all shareholders shall be obligated to sell their shares to the majority shareholder or appeal to the court requiring to establish the fair price of the shares. Where at least one shareholder has applied to the court, the court shall have a right to suspend the squeeze-out procedure until the date its ruling concerning the establishment of the price comes into effect. Within the period when the procedure of the purchase of shares is suspended the shareholders shall be exempted form the obligation to purchase or sell the shares. However the Law does not stipulate in what cases the squeeze-out procedure shall be suspended and in what cases – not.
The ruling of the Supreme Court of Lithuania (SC) in the civil case No. 3K-3-332/2011 develops a practice in this area. EuroChem, the majority shareholder of Lifosa, AB, in accordance with Article 37 of the Law on Securities, has exercised the squeeze-out rule. Since not all of the minority shareholders have sold their shares within 90 days, therefore in accordance with the paragraph 11 of the Article 37 of the Law on Securities EuroChem has appealed to Kėdainiai district court requiring the account managers to make the necessary entries in the securities account. The ruling of the court to make the appropriate entries in the securities account is deemed to constitute the legitimate basis under which for the securities account managers are obligated to make the appropriate entries. In the meantime the Panevėžys regional court has received a minority shareholders claim regarding establishment of the squeeze-out price. Taking into account this, Kėdainiai district court has suspended the case regarding entries in the securities account until the ruling concerning the price of squeeze-out comes into effect. EuroChem disagreed with such a Kėdainiai district court ruling and appealed to a higher court until finally it was brought before the SC.
The SC has clarified that in deciding on the ownership of the remaining shares of the company and obligation to the account managers to make appropriate entries in securities accounts, the court does not decide on the rationality and fairness of the squeeze-out procedure (this question is resolved by Law). The court shall verify all the conditions of squeeze-out and if they all are fulfilled, the court shall recognize the transfer of ownership of shares to majority shareholder. The SC noted that the dispute regarding the squeeze-out price and its results usually does not affect the case regarding the transition of ownership of shares, because the latter case addresses only the question of ownership. The SC also noted that the share price at the time of dispute has already been paid and dispute is going only because of possible premium. In the view of that SC concludes that the suspension of the transition of ownership in case of dispute on the squeeze-out price generally would be disproportional to the potential risk of non-payment of premium.
However, the SC pointed out, that in some cases the court could suspend the transition of ownership until the court ruling regarding the price comes into affect. For instance, existing circumstances indicate that the squeeze-out price offered by majority shareholder is clearly too low and majority shareholder suffering financial difficulties which raises doubts about its solvency and ability to pay premium for the shares. In such a case the court may suspend the case regarding the transition of ownership of shares until the fair price will be established in order to clarify whether the majority shareholder will be obliged to pay premium for shares and whether he will be able to do this.
Before this ruling of Supreme Court of Lithuania, in the event of a dispute concerning the price, the squeeze-out procedure was always suspended and became of an indefinite duration and such a situation unnecessarily worsened the situation of majority shareholders. This SC decision basically provides clarity to the market participants regarding execution of squeeze-out procedure and thus making their expectations more reasonable.