Squeeze-out of minority shareholders

UIA Newsletter
2007, June 1

Austrian law provides for the squeeze-out of minority shareholders by means of a transformation or a demerger provided a sufficient majority (90%) of shareholders is obtained. The ability of the majority shareholder to create a new and exclusive shareholder structure prevails over the rights of the minority shareholders, who are entitled to fair compensation subject to judicial review.

Squeeze-out by transformation

The Austrian Transformation Act (Umwandlungsgesetz) requires that one majority shareholder (the ‘main shareholder’) holds an interest consisting of at least 90% in the company to be transformed. Two types of transformation are then possible: (i) ‘transformation by merger’ (verschmelzende Umwandlung), a specific form of upstream merger whereby the main shareholder requires all assets and liabilities of the transferring company and (ii) ‘establishing transformation’ (errichtende Umwandlung) where the transferring company is transformed into a (limited or unlimited) partnership with the main shareholder becoming the main partner of the new entity.

Prior to the shareholder meeting voting on the transformation, the boards of directors of the companies involved must establish a transformation plan setting out the proposed transaction and the compensation envisaged for those shareholders to be squeezed out. The transformation plan must be based on a balance sheet not older than nine months. An independent certified public accountant must be appointed as auditor of such transformation plan to report, in particular, on the methods of ascertaining the compensation amount and adequacy of such methods.

In the shareholder meeting, the transformation requires only the vote of the main shareholder. The transferring company has to appoint a trustee who will hold all share certificates of the transferring company and the total compensation amount for the minority shareholders squeezed out. Upon registration of the transformation, all assets and liabilities together with all contractual relationships of the transferring company are deemed transferred, by way of general succession, to the main shareholder (or to the newly established partnership). The transferring company is then dissolved without liquidation and is deleted from the Register of Companies.

Each shareholder has the right, within one month of the transformation’s registration, to request the court to examine whether the amount of compensation is appropriate. The law does not provide for a minimum nominal amount of shares to be held by the claimant shareholder(s). The court’s decision on the compensation amount must be based on the opinion of a permanent committee whose members are judges, certified public accountants, and, in the event of a publicly listed company, one member appointed by the Federal Employee’s Chamber and one member of the Austrian Economic Chamber. The valuation of the minority shareholders’ compensation is to be based on the capitalised value of the company’s anticipated earnings with the intrinsic value (Substanzwert) of certain assets being taken into account. The stock price, however, is not used as a basis for valuation of the minority shareholders’ compensation nor are discounted cash-flow methods applied.

Squeeze-out by demerger

For certain reasons (eg., land transfer tax, loss carry-forward, etc.), it is necessary for a company to continue to exist as a separate legal entity other than in the form of a partnership (which could be effected by way of an establishing transformation. In these cases, a non-proportional demerger (nicht-verhältniswahrende Spaltung) is an alternative method for a squeeze-out, a method recently confirmed as lawful by the Austrian Supreme Court. In such a demerger, liquid funds corresponding to the minority shareholders’ compensation are transferred to the new company (‘Newco’) established in conjunction with the demerger. The minority shareholders are then ‘demerged’ into Newco, whereas the majority shareholder(s) become the sole shareholder(s) in the demerged company.

Before the shareholder meeting decides on the demerger, the board of directors must establish a demerger plan that includes information on the assets and liabilities to be transferred to Newco and the compensation envisaged by the minority shareholders. The demerger must be based on a balance sheet not older than nine months. An independent certified public accountant must be appointed as auditor for the demerger to report, in particular, on the methods of ascertaining the amount of minority shareholders’ compensation and its adequacy.

At the shareholder meeting, a vote of 90% in favour of a demerger is required. Upon registration of the demerger at the Register of Companies, the minority shareholders not opting for compensation become shareholders of Newco. All assets and liabilities described in the demerger plan (in this case liquid funds) are deemed transferred, by way of general succession, to Newco. The majority shareholder(s) are then left as the sole shareholder(s) of the demerging company pursuant to the provisions of the demerger plan.

The minority shareholders who opposed the demerger resolution may opt to receive the cash compensation offered in the demerger plan within two months of registration of the demerger (instead of becoming shareholders of Newco). If a minority shareholder disputes the cash payment, he cannot contest the demerger resolution itself but can only ask the court to examine whether the compensation was appropriate. In contrast to the transformation proceedings, only shareholders owning together at least 1% of the shares or having a nominal capital of at least €70,000 are entitled to initiate such a review. The court proceedings and the methods used for the valuation are the same as those in the transformation proceedings.


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