Squeeze-Outs of Minority Shareholders

Squeeze out of minority shareholders: three routes

A squeeze out allows a principal shareholder of a German stock corporation (AG, KGaA or SE) to acquire the shares of the remaining minority shareholders against cash compensation, without their consent. German law offers three routes. The corporate squeeze out under §§ 327a ff. of the Stock Corporation Act (AktG) requires a shareholding of 95% of the share capital and a resolution of the general meeting.

The merger squeeze-out under § 62(5) of the Transformation Act (UmwG) lowers the threshold to 90% if the squeeze-out is linked to an upstream merger of the target into its parent AG. The takeover squeeze out under § 39a of the Securities Acquisition and Takeover Act (WpÜG) is a court procedure available to a bidder who holds 95% of the voting share capital after a takeover or mandatory offer. In all three cases, the adequacy of the cash compensation can be reviewed in appraisal proceedings.

A squeeze-out is usually the final step of a public takeover or a long-term consolidation strategy. It ends the costs and constraints of a listing and of minority shareholder rights and allows full integration of the target into the buyer's group, including its financing, governance and reporting.

The three routes compared

The thresholds are calculated by reference to shares held by the principal shareholder and, for the corporate squeeze-out, shares attributed to it under the group rules of the AktG. Treasury shares of the company are deducted from the share capital. Investors often build up the required stake through a takeover offer, purchases on the market and agreements with large minority shareholders. Voting-rights notifications under the WpHG must be made at each threshold crossed, and purchases after the offer can trigger price adjustment obligations under the takeover rules, so the sequence of purchases should be planned with care.

The corporate squeeze out

The principal shareholder requests the management board to put the squeeze-out on the agenda of a general meeting. It determines the amount of the cash compensation, which must reflect the company's situation at the time of the resolution (§ 327b(1) AktG), and must provide a guarantee from a credit institution authorised in Germany covering the payment obligation. The principal shareholder prepares a written report explaining the requirements and the adequacy of the compensation, and court-appointed expert auditors review the adequacy (§ 327c(2) AktG).

The general meeting adopts the transfer resolution by simple majority, which the principal shareholder controls. Upon entry of the resolution in the commercial register, all shares of the minority shareholders pass to the principal shareholder by operation of law. The compensation bears interest at five percentage points above the base rate from the announcement of the registration (§ 327b(2) AktG). Minority shareholders can challenge the resolution, but not on the ground that the compensation is inadequate (§ 327f AktG); that question goes to appraisal proceedings. Challenges based on procedural errors can delay registration, and companies can apply for a release order allowing registration despite a pending action.

The merger squeeze out at 90%

The merger squeeze-out was introduced in 2011 and is attractive because the threshold is lower. It requires that the acquiring company is an AG (or KGaA or SE) that holds at least 90% of the share capital of the target AG. The target's general meeting must adopt the squeeze out resolution within three months after the merger agreement is concluded, and the merger agreement must state that a squeeze-out of the minority shareholders is to take place in connection with the merger (§ 62(5) UmwG). The squeeze-out takes effect only together with the registration of the merger.

Buyers whose acquisition vehicle is a GmbH often convert it into an AG or establish an AG holding to use this route. The price is that the target ceases to exist by merger into the parent, which must suit the group's structural and tax planning, and the transformation rules on works council information and creditor protection apply.

The takeover squeeze out

After a takeover or mandatory offer, a bidder holding at least 95% of the voting share capital can apply to the Frankfurt am Main Regional Court, which has exclusive jurisdiction, for a court order transferring the remaining voting shares (§ 39a(1) WpÜG). The application must be filed within three months after the end of the acceptance period (§ 39a(4) WpÜG). The consideration must correspond to that offered in the takeover; a cash alternative must always be offered. If the bidder acquired at least 90% of the share capital covered by the offer through the offer itself, the offer consideration is deemed adequate (§ 39a(3) WpÜG).

This presumption gives the takeover squeeze-out its appeal, because it avoids appraisal proceedings in most cases. In practice, however, the 95% threshold is rarely reached through the offer alone, and the corporate squeeze out is used more often.

Minority shareholders, in turn, have a sell-out right: after a takeover or mandatory offer, they can tender their shares within three months of the end of the acceptance period if the bidder is entitled to a takeover squeeze-out (§ 39c WpÜG). See our page on public takeovers under the WpÜG.

Cash compensation and appraisal proceedings

The cash compensation must be adequate, which the Federal Constitutional Court derives from the protection of property in Article 14 of the Basic Law. In practice, it is determined by a business valuation, typically using the capitalised earnings method under professional valuation standards. For listed companies, the stock exchange price is in principle the lower limit.

The Federal Court of Justice has held that the relevant stock exchange value is generally the volume-weighted average price in a three-month reference period before the announcement of the structural measure, and that the value may need to be extrapolated if a long period passes between announcement and the general meeting (BGH, order of 19 July 2010 – II ZB 18/09, Stollwerck).

Each minority shareholder can apply for a judicial determination of the adequate compensation in appraisal proceedings under the Appraisal Proceedings Act (Spruchverfahrensgesetz, SpruchG) within three months after the transfer of shares has been announced (§ 4(1) SpruchG). The court appoints a joint representative for shareholders who do not apply. If the court increases the compensation, the increase benefits all former minority shareholders. Appraisal proceedings often take several years and regularly end with a moderate increase or a settlement, which buyers should factor into their transaction budget from the outset for a squeeze-out.

From the perspective of minority shareholders, the main questions are whether the threshold is genuinely reached, whether the procedure has been followed, and whether the compensation reflects the company's value. Institutional investors and specialised funds sometimes acquire stakes in targets after a takeover precisely because they expect a squeeze-out and an increase in appraisal proceedings. Bidders should therefore expect organised minority shareholders and prepare their valuation documentation for detailed scrutiny.

Timeline and costs

A corporate squeeze-out typically takes four to six months from the formal request to the management board until registration, assuming no challenge action delays the process. The main steps are the request and announcement, the valuation and the court's appointment of expert auditors, the bank guarantee, the invitation to the general meeting with at least 30 days' notice, the general meeting itself, the one-month challenge period and the registration. Where an action is brought, a release order can take several further months.

Costs include the valuation and audit fees, the bank guarantee, the costs of the general meeting, court and notary fees and, later, the costs of appraisal proceedings, including the fees of the joint representative, which the principal shareholder generally bears. The cash compensation itself is usually the largest item and may increase in appraisal proceedings. Buyers should budget for interest on the compensation from registration and for a possible increase.

The target company also has obligations: the management board must provide the principal shareholder with the documents and information needed to determine the compensation, and must publish the required documents from the convening of the general meeting. For listed targets, the inside information rules of the Market Abuse Regulation apply to the decision to pursue a squeeze-out, so the timing of the announcement must be coordinated with ad hoc disclosure duties. See our briefing on ad hoc disclosure.

Planning a squeeze out after a takeover

A buyer planning a squeeze-out should consider the end game when designing the takeover offer: the acceptance threshold, the offer price, parallel purchases and the treatment of shareholders who do not accept. Where the 90% or 95% threshold is not reached, a domination and profit transfer agreement can provide control over the target's management and cash flows, at the cost of compensation payments to outside shareholders; see our briefing on domination and profit transfer agreements. A delisting offer is another option to reduce the costs of the listing without a squeeze out; see our briefing on delisting offers.

Illustration: a hypothetical bidder acquires 86% of a listed German AG through a takeover offer and buys a further 5% on the market over the following months. With 91% held by its acquisition AG, it concludes a merger agreement with the target, includes the squeeze-out statement and convenes the target's general meeting within three months. The minority shareholders receive cash compensation determined by valuation and checked by court-appointed auditors, and several of them initiate appraisal proceedings.

How TRW & Co helps

We advise principal shareholders, bidders and target companies on squeeze-out procedures: choosing the route, building the required stake, preparing the transfer resolution, the principal shareholder's report and the bank guarantee, managing the general meeting and challenge actions, and representing parties in appraisal proceedings. We also advise minority shareholders on their rights. Our public takeovers and litigation teams work together. Contact us to discuss a squeeze-out.