In January 2017 an Austrian regional court was asked to confirm the legality of a limited liability company's shareholder resolution aimed at squeezing out a minority shareholder. The court dismissed the action, concluding that the resolution complies with all applicable provisions of the Squeeze-Out Act. The plaintiff appealed this decision and requested that the Constitutional Court clarify whether the Squeeze-Out Act complied with the Constitution.
The plaintiff argued that certain provisions of the Squeeze-Out Act(2) violate the Constitution because they restrict shareholders' property rights and the principle of equality (rights enshrined in both the Constitution and the European Convention on Human Rights). For shareholders of limited liability companies, in contrast to shareholders of public limited companies, the equity stake and the personal involvement in the company are critical. Squeezing out a minority shareholder without their consent would therefore violate their property rights, irrespective of whether fair compensation is paid. Further, the plaintiff contended that such provisions violate the principle of trust and equality since minority shareholders cannot foresee the timing of their potential exclusion.
The Constitutional Court saw things differently, holding as follows:
- The provisions of the Squeeze-Out Act on the exclusion of minority shareholders do not violate the Constitution.
- The creation of efficient corporate structures is in the public's interest. The legislation cannot be opposed if it classifies the interests of one or more shareholders holding only minority interests as being lower than those of majority shareholders and accordingly allows the exclusion of such minority shareholders under certain conditions. The 90% threshold(3) required to squeeze out a minority shareholder also fits into existing corporate law because minority shareholders (with a shareholding of less than 10%) are not usually granted any rights to determine the company's policy or strategy.
- The Squeeze-Out Act also applies to corporations founded before its implementation. As Austrian corporate law has always provided for similar rules, this does not violate the Constitution.
- The provisions on squeezing out shareholders are not mandatory. Their application can be excluded or modified in a company's articles of association.
The Constitutional Court's judgment was eagerly awaited. As it provides legal certainty in a highly sensitive environment, the decision counts as a positive development.
For further information on this topic please contact Paul Nimmerfall or Daniel Madari at Schoenherr Attorneys at Law by telephone (+43 1 5343 70) or email (firstname.lastname@example.org or email@example.com). The Schoenherr Attorneys at Law website can be accessed at www.schoenherr.eu.
(1) VfGH 27.6.2018, G 30/2017.
(2) The Squeeze-Out Act allows shareholders holding more than 90% of the shares in a public limited company or limited liability company to squeeze out minority shareholders.
Co-published by Daniel Madari (Intern, Schoenherr Austria).
This article was first published on International Law Office.
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