Squeeze-out

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A squeeze-out [1] or squeezeout, [2] sometimes synonymous with freeze-out (freezeout), [2] is the compulsory sale of the shares of minority shareholders of a joint-stock company for which they receive a fair cash compensation.

Joint-stock company business entity which is owned by shareholders

A joint-stock company is a business entity in which shares of the company's stock can be bought and sold by shareholders. Each shareholder owns company stock in proportion, evidenced by their shares. Shareholders are able to transfer their shares to others without any effects to the continued existence of the company.

Contents

This technique allows one or more shareholders who collectively hold a majority of shares in a corporation to gain ownership of remaining shares in that corporation. The majority shareholders incorporate a second corporation, which initiates a merger with the original corporation. The shareholders using this technique are then in a position to dictate the plan of merger. They force the minority stockholders in the original corporation to accept a cash payment for their shares, effectively "freezing them out" of the resulting company.

Share (finance) single unit of ownership in a corporation, mutual fund, or any other organization

In financial markets, a share is a unit used as mutual funds, limited partnerships, and real estate investment trusts. The owner of shares in the corporation is a shareholder of the corporation. A share is an indivisible unit of capital, expressing the ownership relationship between the company and the shareholder. The denominated value of a share is its face value, and the total of the face value of issued shares represent the capital of a company, which may not reflect the market value of those shares.

Corporation separate legal entity that has been incorporated through a legislative or registration process established through legislation

A corporation is an organization, usually a group of people or a company, authorized to act as a single entity and recognized as such in law. Early incorporated entities were established by charter. Most jurisdictions now allow the creation of new corporations through registration. Corporations enjoy limited liability for their investors, which can lead to losses being externalized from investors to the government or general public, while losses to investors are generally limited to the amount of their investment.

Process

Although a LBO is an effective tool for a group of investors to use to purchase a company, it is less well suited to the case of one company acquiring another. An alternative is the freeze-out merger; the Laws on tender offers allow the acquiring company to freeze existing shareholders out of the gains from merging by forcing non-tendering shareholders to sell their shares for the tender offer price. [3]

Leveraged buyout

A leveraged buyout (LBO) is a financial transaction in which a company is purchased with a combination of equity and debt, such that the company's cash flow is the collateral used to secure and repay the borrowed money. The use of debt, which normally has a lower cost of capital than equity, serves to reduce the overall cost of financing the acquisition. The cost of debt is lower inter alia because interest payments often reduce corporate income tax liability, whereas dividend payments normally do not. This reduced cost of financing allows greater gains to accrue to the equity, and, as a result, the debt serves as a lever to increase the returns to the equity.

To complete freeze-out merger, the acquiring company first creates a new corporation, which it owns and controls. The acquiring corporation then makes a tender offer at an amount slightly higher than the current target corporation' stock price. If the tender offer succeeds, the acquirer gains control of the target and merges its assets into the new subsidiary corporation. In effect, the non-tendering shareholders lose their shares because the target corporation no longer exists. In compensation, non tendering shareholders get their right to receive the tender offer price for their shares. The bidder, in essence, gets complete ownership of the target for the tender offer price. Because the value the non-tendering shareholders receive for their shares is equal to the tender price (which is more than the premerger stock price), the law recognizes it as fair value and non-tendering shareholders have no legal recourse. Under these circumstances, existing shareholders will tender their stock, reasoning that there is no benefit to holding out: if the tender offer succeeds, they get the tender price anyway; if they hold out, they risk jeopardizing the deal and forgoing the small gain. Hence the acquirer is able to capture almost all the value added from the merger and, as in the leveraged buyout, is able to effectively eliminate the free rider problem. This freeze-out tender offer has a significant advantage over an LBO because an acquiring corporation need not make an all-cash tender offer. Instead, it can use shares of its own stock to pay for the acquisition. In this case, the bidder offers to exchange each shareholder’s stock in the target for stock in the acquiring company. As long as the exchange rate is set so that the value in the acquirer’s stock exceeds the pre-merger market value of the target-company stock, the non-tendering shareholders will receive fair value for their shares and will have no legal recourse.

Criticism

The legal community has criticized the present rules with regard to freeze-out mergers as being biased against the interests of the minority shareholders. For example, if a gain in stock value is anticipated by the majority, they can deprive the frozen-out minority of its share of those gains. [4]

Germany

In Germany, a pool of shareholders owning at least 95% of a company's shares has the right to "squeeze out" the remaining minority of shareholders by paying them an adequate compensation. [5] This procedure is based on the Securities Acquisition and Takeover Act (ger.'Wertpapiererwerbs- und Übernahmegesetz, WpÜG). An alternative procedure is governed by §§ 327a 327f of the German Stock Corporation Act [6] (ger. Aktiengesetz, AktG), valid since January 1, 2002. [7]

German language West Germanic language

German is a West Germanic language that is mainly spoken in Central Europe. It is the most widely spoken and official or co-official language in Germany, Austria, Switzerland, South Tyrol (Italy), the German-speaking Community of Belgium, and Liechtenstein. It is also one of the three official languages of Luxembourg and a co-official language in the Opole Voivodeship in Poland. The languages which are most similar to German are the other members of the West Germanic language branch: Afrikaans, Dutch, English, the Frisian languages, Low German/Low Saxon, Luxembourgish, and Yiddish. There are also strong similarities in vocabulary with Danish, Norwegian and Swedish, although those belong to the North Germanic group. German is the second most widely spoken Germanic language, after English.

For the first time in German history, this law provided a mandatory legal framework for takeovers, replacing the former voluntary takeover code (ger. Übernahmekodex). [8] Although it has been asserted that the law does not break the German constitution it has courted the resentment of many small investors who consider it to be the legalization of expropriation.

Conditions required

The criteria for a squeeze-out are set out in § 327a AktG. The exclusion of minority shareholders of the company requires: a corporation or a partnership limited by shares (KGaA) as affected society (1), a major shareholder as defined § 327a AktG (2), a "request" from him, the company's shareholders may decide to transfer the shares of minority shareholders on him (3). This decision must be taken at a meeting in this regard (4) and provide a reasonable cash compensation for minority shareholders (5).

Decision

The decision to enforce a squeeze out must be made by holding a vote at the general meeting; as the major party already commands the vast majority of all votes, this usually is a mere formality. The compensation value is determined by the company's economic situation at the date of the general meeting, the minimum compensation being the share's average stock exchange price during the past three months. [8]

Objection

Expelled shareholders can appeal against the squeeze out according to § 243 AktG. [9] Also, according to this section, some reasons, such as inadequate compensation, are not sufficient to inhibit the squeeze out. Even while the rescission proceedings are still running the main shareholder has the right to register in the Commercial Registry if he meets the preconditions defined in §§ 327e sec. 2, § 319 Abs. 5, 6 AktG; [10] by doing so an approval process is initiated and all shares held by minor shareholders devolve to him.

United Kingdom

Under UK law, section 979 of the Companies Act 2006 is the relevant "squeeze out" provision. It gives a takeover bidder who has already acquired 90% of a company's shares the right to compulsorily buy out the remaining shareholders. Conversely section 983 (the "sell out" provision) allows minority shareholders to insist their stakes are bought out. (see Companies Act 2006)

United States

In the US squeeze-outs are governed by State laws, e.g. 8 Delaware Code § 253 permits a parent corporation owning at least 90% of the stock of a subsidiary to merge with that subsidiary, and to pay off in cash the minority shareholders. The consent of the minority shareholders is not required. They are merely entitled to receive fair value for their shares. This is in contrast to freeze-outs, where the minority interest is unable to liquidate their investment.

See also

Notes

  1. "Squeeze-out". Wex. Cornell Law School. Retrieved 20 December 2017.
  2. 1 2 "squeeze out". Merriam-Webster, Inc. Retrieved 20 December 2017.
  3. Berk & DeMarzo (2014). Corporate Finance, Third edition. Pearson Education Limited. p. 955.
  4. Shareholder Welfare and Bid Negotiation in Freeze-Out Deals: Are Minority Shareholders Left Out in the Cold?
  5. Joanna WARCHOL, Squeeze-out in Deutschland, Polen und dem übrigen Europa, Heidelberg 2007; http://www.nomos-shop.de/productview.aspx?product=9708
  6. Bundesministerium der Justiz - Aktiengesetz §§ 327a - 327f. Visited on 05/09/2006 (ger.)
  7. Deutsche Bank |Squeeze Out. Visited on 05/09/2006
  8. 1 2 Investment Banking Briefing: Developments in German Takeovers and Squeeze-Outs. April 2002
  9. Bundesministerium der Justiz - Aktiengesetz § 243. Visited on 09/05/2006 (ger.)
  10. Bundesministerium der Justiz - Aktiengesetz § 319. Visited on 05/09/2006 (ger.)

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