Forced share buyback – how to defend against being ‘squeezed out’ of a public limited company?

In order to carry out a compulsory share buy-back procedure effectively, the following conditions, amongst others, must be met:

• the shares may be acquired by no more than five shareholders who together hold not less than 95% of the share capital;
• the resolution must be adopted by open and roll-call vote, by a majority of 95% of the votes cast, unless the articles of association lay down stricter requirements;
• the resolution must be published;
• the resolution must contain a distribution plan, i.e. specify the shares subject to redemption and the shareholders who undertake to redeem the shares, as well as specify the shares allocated to each of the purchasers;
• the share buy-back must be carried out in accordance with the requirements of Article 417(1)-(3) of the Commercial Companies Code, i.e. after an expert has determined the buy-back price of the shares, the majority shareholders must pay the buy-back sum, and then the company (management board) must buy back the shares on behalf of the majority shareholders

(Supreme Court judgment of 20 February 2008, II CSK 441/07).

The institution of compulsory share buy-out is intended to ensure the smooth and efficient functioning of the company and, at the same time, provides protection against disloyal minority shareholders who, through their conduct, expose the company to severe losses. But what about cases where majority shareholders abuse their position to gain full control of the company?

Where majority shareholders apply the compulsory share buy-out procedure – depending on the facts of the case – minority shareholders have, in practice, the following options to protect their rights:

1. an action to set aside a resolution of the general meeting of shareholders (hereinafter ‘GMS’);

Pursuant to Article 422 of the Commercial Companies Code, a resolution of the company’s GMS which is contrary to the articles of association or good practice, and which is detrimental to the company’s interests or is intended to prejudice a shareholder, may be challenged by means of an action to set aside the resolution brought against the company. The right to bring such an action is held, inter alia, by:

• a shareholder who voted against the resolution and, after it was adopted, requested that their objection be recorded in the minutes – provided that the request to record the objection must be made immediately, i.e. before proceeding to the next item on the agenda;
• a shareholder who was unjustifiably denied admission to the general meeting;
• a shareholder who was not present at the AGM – in the event of the AGM having been convened improperly or a resolution having been adopted on a matter not included on the agenda.

If a shareholder – due to the completion of a compulsory share buy-back procedure – has lost their shareholder status, they retain the standing to challenge resolutions concerning their corporate rights or property rights. This position is well-established in the case law of the Supreme Court; for example – in the judgment of 9 September 2010, ref. no. I CSK 530/09, it was stated that a partner (shareholder) retains standing to challenge a resolution of the meeting (general meeting) concerning the compulsory redemption of their shares.

In order to successfully bring an action to set aside a resolution, it is necessary to demonstrate the existence of specific ‘grounds’ set out in Article 422 § 1 of the Commercial Companies Code. A resolution of the shareholders may be set aside (i) it is contrary to the articles of association and, at the same time, prejudices the interests of the company or is intended to prejudice a shareholder, or (ii) it is contrary to good practice and, at the same time, prejudices the interests of the company or is intended to prejudice a shareholder.

An action to set aside a resolution of the general meeting must be brought within one month of receiving notice of the resolution, but no later than six months from the date on which the resolution was adopted.

2. an action for a declaration of nullity of a resolution of the General Meeting of Shareholders;

Shareholders who are entitled to bring an action to set aside a resolution of the General Meeting of Shareholders are also entitled to bring an action to declare the resolution invalid on the grounds that it is contrary to law.

Legal doctrine identifies the following cases where the adoption of a resolution by the General Meeting of Shareholders may be regarded as a void but effective act:

1. The General Meeting lacks the capacity to adopt resolutions;
2. the form of a notarial deed, which is required for resolutions of the General Meeting of Shareholders on pain of nullity (ad solemnitatem), has not been observed;
3. the resolution is contrary to the Act;
4. the resolution is intended to circumvent the law.

The right to bring an action for a declaration of invalidity of a resolution expires six months after the date on which the entitled party became aware of the resolution, but no later than two years after the date on which the resolution was adopted.

3. challenging the valuation of shares applied in the compulsory share buy-back procedure.

The price at which the shares subject to compulsory redemption are acquired is determined by a valuation carried out by an expert appointed by a resolution of the General Meeting of Shareholders. Pursuant to Article 417(1), third sentence, in conjunction with Article 418(3), second sentence, of the Commercial Companies Code and Article 312(8) of the Commercial Companies Code, in the event of a disagreement regarding the results of the valuation, the dispute shall be resolved by the registry court upon application by a shareholder.

The court shall consider the shareholders’ application by issuing a ruling against which no appeal lies. Following a motion filed by the shareholders, the registry court may also – if it deems it justified – appoint a new expert. As rightly pointed out in the legal literature, the registry court does not, however, have the power to interfere with the actual content of the expert’s opinion.

As I mentioned at the beginning of this article, in order for a compulsory share buy-out to be carried out effectively, a number of conditions must be met, including that the buy-out must be conducted in accordance with the requirements set out in Article 417(1)-(3) of the Commercial Companies Code. This means that there are in fact three parties to the compulsory buy-out procedure, namely (i) the company, (ii) the ‘buying’ shareholders, and (iii) the ‘sold’ shareholders. The compulsory share buy-out procedure begins with the adoption of a resolution by the General Meeting of Shareholders, which gives rise to two contractual relationships:

1. the obligation of the ‘sold-out’ shareholders to surrender their share certificates in exchange for the redemption price, and
2. an obligation on the part of the ‘buying’ shareholders to pay the redemption sum to the Company and to take over the redeemed shares in accordance with the distribution plan.

The compulsory share buy-out procedure comprises two distinct stages. In the first stage, the company acquires shares from the ‘sold-out’ shareholders in its own name but on behalf of the shareholders. It is accepted in legal doctrine that the agreements under which the Company acquires the shares are concluded subject to a condition precedent – payment of the full redemption price into the Company’s account. It is only in the next stage that the company transfers the shares to the ‘buying’ shareholders. This means that payment of the buy-out price by the ‘buying’ shareholders constitutes a condition for the validity of the entire compulsory share buy-out procedure.

According to the judgment of the Supreme Court of 20 February 2008, file ref. no. II CSK 441/07: “Failure to pay the buy-out price, even in part, renders the entire share buy-out procedure void. It is irrelevant to this consequence who bears responsibility, and to what extent, for the compulsory share buy-out not taking effect, as well as how that person may be held liable.”

This means that a successful challenge to the share valuation applied in the compulsory share buy-out procedure may affect the validity of the entire compulsory share buy-out procedure.