Vol 16 (2019) - Issue 4

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Minority Shareholders' Squeeze-outs and Share Valuations: A Comparative Analysis of Statutory Provisions and Judicial Approach between the United Kingdom, Delaware and Poland - Part One

Synopsis

Squeeze-out is one of the most controversial legal mechanisms which permits what ultimately amounts to an expropriation of minority shareholders in certain specified circumstances. However, due to its sensitive nature, the regulation of the mechanism by both the legislation and the judiciary amounts, in practice, to walking a thin line of balancing the conflicting interests of majority and minority shareholders. It is also a thin line between improving economic efficiency and ensuring fairness to the minority shareholders. The dynamics of these interactions impact the entire corporate lifecycle, as well as the external markets. The article analyses the differing statutory regulation of the minority squeeze-out right and its practical enforcement by the judiciary in two common law jurisdictions: the UK and Delaware, and one civil law jurisdiction: Poland. In all of the analysed jurisdictions, the law requires that minority shareholders be bought-out at a 'fair price'. The determination of such 'fair price' is subjective, problematic, and often leads to litigation. The statutes are silent on the topic of valuation of the minorities’ shares, adding yet another element of uncertainty and surprise. The three analysed jurisdictions achieve varying levels of minority protection, with Delaware being the least minority-friendly. Overall, the UK appears to achieve a high level of minority shareholders’ protection and the solutions it has adopted should be commended as the most effective out of the three jurisdictions considered in this article. The article concludes by stating that the main pitfall of the approaches taken by all the three jurisdictions is that none of them offers a satisfactory remedy against the expropriatory squeeze-out mechanism itself, which effectively turns it into an absolute right of the bidder where the relevant shareholding thresholds have been reached and there have been no procedural irregularities. The only remedy is the price appraisal mechanism which is often unsatisfactory to the squeezed-out minority as it involves the necessity of resorting to litigation.
This following Part I of the article deals first of all with a recap of fundamental rules relevant to the analysed issue, i.e. the shareholders’ equality rules, the majority rule and some principles relevant in the context of takeovers (predominantly the mandatory bid rule). It considers the nature of expropriation which may be effected through the use of the squeeze-out mechanism and explains the rationale for keeping squeeze-outs in the legal books. It then outlines and evaluates relevant statutory squeeze-out provisions in the three analysed jurisdictions.
Part II of this article will visit two distinct areas relevant to the considered topic: enforcement and judicial treatment of squeeze-outs, and subsequently approaches to the minority share valuations. Part II will start by considering the approach of the Delaware courts to the concept of fairness, and the tests developed by that jurisdiction. It will then contrast that position with the European jurisdictions, discussing judicial attitude and the robustness of enforcement. It will further consider price review and appraisal and valuation techniques adopted by each of the jurisdictions.