Squeeze-out Mergers: Supreme Court's View On Valuation Issues

Originally published on International Law Office

Introduction

There are several reasons for launching a public takeover bid in order to acquire another company and the different parties involved may have different interests and objectives. For example, an offeror may wish to take complete control of a target with a view to integrating the target fully into its organisational group structure in order to reduce costs. Conversely, an offeror may want only to control a target, which can be accomplished by holding more than 50% of the voting rights, as this will allow it to control the composition of the target's board of directors. However, in targets with an atomised shareholder base and low attendance rates at shareholder meetings, it may be possible to achieve effective control with a smaller share of the voting rights – which is reflected in the fact that a mandatory public offer is triggered at the lower threshold of 33.3% of the outstanding shares.

An offeror's influence increases when it holds more than two-thirds of the voting rights, as it can not only influence, but also control any resolutions which require a qualified quorum under Article 704 of the Code of Obligations. However, significant barriers remain, such as the principles of Article 717 of the code, whereby a company must be led in consideration of its own interests and all shareholders must be treated equally. Additionally, minority shareholder rights must be taken into account, which may reduce the offeror's ability to integrate the target completely into its organisational group structure. Therefore, it may be in the offeror's interest to control 100% of the outstanding equity.

An offeror is not permitted to make a successful takeover bid which stipulates that all or an unreasonably high percentage of shareholders (eg, 90% or even 98%) must tender their shares. Therefore, after the settlement of many takeover bids, there are minority shareholders which have opted not to tender their shares, and thus remain shareholders of the target. To avoid restrictions stemming from corporate law forcing a new majority shareholder to take the interests of minority shareholders into account, an offeror will have to take a different route in order to end up holding 100% of the voting rights. According to Swiss law, an offeror has two options to exclude or 'squeeze out' minority shareholders after a public takeover bid.

Squeeze-out options under Swiss law

Article 33 of the Stock Exchanges and Securities Trading Act

The first option is to cancel all outstanding equity securities according to Article 33 of the Stock Exchanges and Securities Trading Act, whereby an offeror must hold more than 98% of the voting rights of the target. The target must be a Swiss company whose equity securities are, in whole or in part, listed on an exchange in Switzerland (Article 2 (e)). The offeror must petition a court within three months following the close of the tender offer in order to cancel outstanding equity securities. The equity securities must be re-issued by the target and allotted to the offeror, either against payment of the offer price or fulfilment of the exchange offer in favour of the holders of the equity securities which have been cancelled. Examples of squeeze-outs pursuant to the Stock Exchanges and Securities Trading Act are the takeover of Swiss International Air Lines Ltd by Lufthansa and the Almea Foundation, and the takeover of Schulthess Group AG by NIBE Industrier AG.

Article 8 of the Merger Act

The second option to squeeze out minority shareholders is set out in the Merger Act: if the acquiring entity holds more than 90% of the voting rights, it can enforce a squeezeout merger, whereby minority shareholders receive a compensation payment by the acquiring entity rather than shares in the acquiring entity, as would be the case in an ordinary merger. A squeeze-out merger was successfully implemented in the takeovers of Eichhof Holding AG by Heineken Switzerland AG, and BB Medtech AG by Vontobel Beteiligungen AG.

The procedure of a squeeze-out merger pursuant to the Merger Act is as follows. The board of directors of the acquiring and transferring entity enters into a written merger agreement. The acquiring party indicates the amount of compensation that is to be paid to the transferring entity's minority shareholders. The compensation can either consist of cash or listed tradable securities (eg, shares in the acquiring entity's parent company).

Thereafter, a merger report is prepared for the attention of shareholders; this report must mention the amount of compensation to be paid to the transferring entity's minority shareholders and detail...

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