Compulsory buy-out of shares – sell-out

With reference to the article concerning the situation of minority shareholders in a joint-stock company, which serves as an introduction to a series of articles, I would hereby like to present the legal institution provided for in the Commercial Companies Code that enables a shareholder to obtain protection through the compulsory buy-out of shares.

The basis for the regulation of the compulsory buy-out of shares is Article 418¹ of the Commercial Companies Code. Further detailed provisions enabling minority shareholders to obtain legal protection can be found in the following articles: Article 416 § 4, Article 418 § 2b, Article 516 § 3, Article 516¹¹, and Article 541 § 5 of the Commercial Companies Code, which will be discussed in detail in subsequent articles. In view of the above and in line with the previous article, it should be emphasized that the purpose of the institution of compulsory buy-out of shares, also referred to as a “sell-out,” is to enable minority shareholders to “exit” the company.

Sell-out

The body entitled to demand the buy-out of shares are shareholders who jointly represent no more than 5% of the company’s share capital. Such a demand may be addressed to shareholders not exceeding five persons who together hold at least 95% of the company’s share capital, with the proviso that each majority shareholder must hold not less than 5% of the share capital. The demand for the buy-out of shares should be submitted in the form of an application to the management board and should include a detailed specification of the requirements and the grounds for placing the matter on the agenda of the next general meeting of shareholders. It should be borne in mind that such a demand must be submitted no later than one month before the date of the next general meeting.

A request by a minority shareholder to include the buy-out of shares on the agenda of the general meeting is very often impossible to implement, and some legal scholars even take the view that this right is in fact a “dead” right. From a practical point of view, it should be noted that a general meeting is very rarely convened more than 2–3 weeks before its scheduled date; therefore, meeting the deadline specified in Article 418¹ § 2 of the Commercial Companies Code is very often impossible. If the above deadline cannot be met, a practical “back door” solution is Article 401 of the Commercial Companies Code, which grants the right to request supplementation of the agenda of the general meeting within 14 days of its convening. The only drawback of this solution is the requirement that the shareholders hold at least 1/20 of the share capital.

Resolution of the general meeting

The basis for a compulsory buy-out of shares is a resolution of the general meeting of shareholders, although it does not have to be adopted immediately. If the resolution is not adopted at the next general meeting, the company is obliged to acquire the minority shareholders’ shares for the purpose of their redemption within three months. Pursuant to Article 414 of the Commercial Companies Code, the resolution should be adopted by an absolute majority of votes, with the proviso that each share carries one vote without any privileges or restrictions (Article 416 §§ 2 and 3 of the Commercial Companies Code). Moreover, the resolution should be adopted by open and roll-call voting and subsequently published.

Effectiveness of the buy-out

In connection with exercising the sell-out right, minority shareholders should submit to the company, within one month from the date of the general meeting, all share certificates or proof that the shares have been deposited at the company’s disposal. It is worth bearing in mind Article 418 § 6, second sentence, of the Commercial Companies Code, pursuant to which, until the full buy-out price has been paid, minority shareholders whose shares are subject to the buy-out retain all rights attached to the shares. As long as the entire amount corresponding to the buy-out price has not been paid, minority shareholders, in light of the above provision, should be treated by the company as fully entitled shareholders.

After the buy-out price has been paid by the purchasers of the shares, the management board is obliged to release the acquired shares or documents confirming the transfer of the shares. It should be agreed with the established view in legal doctrine that allowing a partial buy-out of shares would be contrary to the essence and nature of a compulsory buy-out of shares, and therefore such actions must be considered inadmissible. Consequently, a shareholder may exercise the sell-out right only in respect of all shares held by them.

Summary

Despite the relatively difficult position of a minority shareholder in a joint-stock company, resulting from the limited significance of their voting power, the regulations contained in the Commercial Companies Code give such a shareholder the opportunity to exit the company. It is worth noting that the compulsory buy-out procedure is not complicated; therefore, if a minority shareholder does not wish to continue broadly understood cooperation with the company, this method of leaving the company should be considered. A compulsory buy-out of shares makes sense particularly when the company’s articles of association are silent on a “put option” or a “tag along” clause, which will be discussed in subsequent articles.