On 12 April 2022, the new Holding Law was published in the Polish Journal of Laws, introducing into the Commercial Companies Code new regulations on the activity of corporate groups, including the possibility to squeeze out minority shareholder’s stakes in subsidiaries.
The most important provisions of the amending act enter into force on 13 October 2022. The new solutions concerning the procedure for squeezeout of shareholders in corporate groups deserve special attention. Until now, this type of regulation has basically only applied to a joint-stock company. Such a possibility did not exist in a limited-liability company.
Squeezeout and buyout: How it is today
Currently, to effectively squeeze out the shareholders of a joint-stock company takes several steps. First and foremost, high thresholds must be met. The resolution to squeeze out minority shareholders must be made by a majority of at least 95% of the votes cast by not more than five shareholders, each holding not less than 5% of the share capital, in an open roll-call vote, unless the company’s articles of association impose stricter requirements for validity of the squeezeout. Each share has one vote (with no privileges or restrictions).
The share redemption price is determined by an expert appointed by the general meeting or the registry court at the company’s request. The entities buying out the shares are required to pay the price for the bought-out shares into the company’s account. Payment of the buyout price by the majority shareholders is a prerequisite for effectiveness of the entire squeezeout procedure.
Also, currently, minority shareholders can demand buyout of their own shares. A shareholder or shareholders representing no more than 5% of the share capital may request inclusion in the agenda of the next general meeting of a resolution on buyout of their shares by no more than five shareholders representing jointly no less than 95% of the share capital, each holding no less than 5% of the share capital (majority shareholders).
If the buyout resolution is not adopted, the company is obligated to purchase the shares of the minority shareholders, and the majority shareholders are liable to the company for repaying the entire redemption amount.
In a squeezeout, the share buyout price is equal to the value of the net assets per share, as shown in the financial statements for the most recent financial year, less the amount to be distributed to shareholders. However, the minority shareholders may request that the court appoint an expert to determine the market price or fair buyout price.
Other ways to part with a shareholder
Under the provisions currently in force, it is possible to demand expulsion of a shareholder from a company. However, this is not quick and easy, as a lawsuit and court ruling are necessary.
For example (as we have already written here), in a limited-liability company, for important reasons relating to a given shareholder, the court may rule that the shareholder be expelled from the company at the request of all other shareholders, if the shares of the shareholders requesting expulsion constitute more than half of the share capital (Commercial Companies Code Art. 266). The acquisition price of the shares is set by the court. However, it is necessary to show “good cause,” such as something that prevents or substantially hinders the company’s operations. For example, according to the case law, such acts may include engaging in competitive activities, acting to the detriment of the company, or abusing the right of inspection.
Similarly, in a simple stock company (Art. 30049), for important reasons relating to the shareholder in question, a shareholder or shareholders representing more than half of the total number of votes may request the court to order expulsion of the shareholder from the company.
Additionally, in a simple stock company, a shareholder dissatisfied with the prevailing situation may demand to leave the company. The court may order the shareholder severed from the company if there is a valid reason justified by the relations between the shareholders or between the company and the resigning shareholder, resulting in gross harm to the resigning shareholder.
Another way for companies’ shareholders to part ways is to redeem the shares, but assuming no consent of the shareholder whose shares are to be redeemed, it would have to be a compulsory redemption. But this type of redemption is allowed only if the articles of association of the company allow it and define the prerequisites for compulsory redemption (Art. 199, 30044 and 359). Therefore, it would be necessary to foresee in advance and, as far as possible, describe precisely the reasons, procedure and rules for redemption. Regardless, in situations of tension between the shareholders, the use of this procedure often results in litigation initiated by the shareholder threatened with redemption.
New ways to squeeze out and buy out shares within a corporate group
The amendment taking effect on 13 October 2022, known as the “Holding Law,” introduces additional opportunities to request squeezeout and buyout of shares, and will also apply to limited-liability companies. However, they will only be available for use in a company “participating in a corporate group.”
The new provisions will allow the subsidiary’s shareholders to adopt a resolution (by a qualified ¾ majority vote) on the subsidiary’s membership in a corporate group. Such domination will be subject to disclosure in the commercial register, and then the parent company will be able to issue binding instructions to the subsidiary regarding the subsidiary’s affairs (see more in the article “New law on corporate groups enters into force in October 2022”). Therefore, the additional (new) grounds for squeezeout and buyout of shares will not be applicable to every corporate group, but only to formally established corporate groups.
The new law introduces the possibility to squeeze out minority shareholders in both a limited-liability company and a joint-stock company (Art. 2111). The shareholders of a company may adopt a resolution on compulsory squeezeout of shares of shareholders representing no more than 10% of the share capital by the parent company, which directly represents at least 90% of the share capital. A threshold lower than 90%, but not less than 75% of the share capital, may be specified in the company’s articles of association.
The rest of the squeezeout procedure for a shareholder of a company participating in a corporate group will be governed by certain provisions relating to the squeezeout of shareholders in a joint-stock company (not participating in a corporate group), including the method of setting the price.
Another option for the majority shareholder to buy out the minority shareholder is to introduce certain changes to the articles of association, with the minority shareholder objecting to the changes. A subsidiary participating in a corporate group (other than a wholly-owned company) must refuse to comply with a binding instruction if a reasonable fear exists that it is contrary to the interests of the subsidiary and will cause damage to it that will not be remedied by the parent company or another group company.
Finally, the articles of association of a subsidiary that is a member of a corporate group may provide for additional grounds for refusing to execute a binding instruction. The effectiveness of a resolution to amend the articles that
- Introduces such additional basis, or
- Lowers the aforementioned threshold of 90% of the share capital (to a maximum of 75%) enabling a buyout of minority shareholders
depends on the buyout by the parent company of the shares of the subsidiary’s shareholders who do not agree to the change and who also submit a request to buy out their shares. The buyout price is to be determined by an expert selected by the shareholders meeting or, if the meeting did not make such a selection, by an expert appointed by the court (at the request of the management board).
The new provisions are also intended to facilitate the exit from the company of minority shareholders who do not wish to participate in a company that is formally part of a capital group.
A minority shareholder representing no more than 10% of the share capital of a subsidiary participating in a corporate group may demand inclusion in the agenda of the next shareholders meeting of a resolution on buyout of its shares by the parent company, which represents directly, indirectly or by agreement with other persons, at least 90% of the share capital of the subsidiary participating in the corporate group.
Only the practice will show whether the new regulations on binding instructions and management board members’ liability will prove so beneficial to existing informal corporate groups that they will decide to adopt resolutions establishing formal corporate groups.
Certainly, the new provisions introduce solutions beneficial to the majority shareholders of companies participating in a corporate group who want to part with minority shareholders. The threshold for application of these solutions is lower than that applicable to a joint-stock company not participating in a corporate group (in principle 90%, and in certain cases as low as 75% of participation in the share capital, instead of 95%). Additionally, a squeezeout can also be conducted under the new rules in a limited-liability company (participating in a corporate group). Therefore, formalising a corporate group may allow the majority shareholders to squeeze the minority shareholders out of the company.
On the other hand, under the new provisions, minority shareholders who no longer wish to be in a company that is part of a corporate group will be able to demand buyout of their shares themselves.
Bartosz Kuraś, attorney-at-law, M&A and Corporate practice, Wardyński & Partners