Germany has some forms of appraisal rights – depending on whether the squeeze-out method was used against minority shareholders, and what form that method took. German law offers three squeeze-out methods: one contained in the WPUG (German takeover law which implemented the European Takeover Directive and the squeeze-out right included in the Directive), another contained in the General Stock Corporation Act, and another contained in the German Transformation Act.

  • The first squeeze-out right contained in the WPUG, which implements the Takeover Directive, allows a bidder who, after the launch of a takeover offer or mandatory offer, acquires 95% of the total issued share capital to acquire the remaining shares for fair consideration. In this case we are dealing solely with listed companies.  There are detailed rules about the form and level of the compensation. The squeeze-out procedure is very detailed, with specific price requirements. The squeeze-out is carried by court order, thus making it more difficult to challenge.
  • Another form of squeeze-out right is contained in the Stock Corporation Act. It applies to both listed and unlisted stock corporations (AG- Aktiengesellschaft). It is available to shareholders exceeding 95% of the share capital. The majority shareholder can acquire the remaining shares against payment of an appropriate compensation. The execution of the squeeze-out is decided by the general meeting of shareholders. Shareholders can challenge the resolution of the general meeting in court and also challenge the appropriateness of the compensation in court (this form of appraisal right would more closely resemble U.S. judicial appraisal proceedings).
  • The final squeeze-out method is contained in the German Transformation Act, which was introduced in order to simplify parent-subsidiary mergers. A shareholder directly owning 90% or more of the share capital of the target company can implement a merger squeeze-out under the German Transformation Act. The target company is merged into its parent entity and the minority shareholders are squeezed out, requiring “adequate” cash consideration when the merger is completed. This more resembles the cash-out merger found in the US.  There needs to be a shareholder resolution which can be challenged by shareholders.

**Lowenstein Sandler thanks Dr. Alexandros L. Seretakis, Assistant Professor in Law at the Trinity College Dublin-The University of Dublin, for this post.  Lowenstein Sandler LLP does not practice in Germany or the EU.

Our article “Fair Value of Minority Shares in a Closely Held Company” published in the December 2018 issue of the New Zealand Business Law Quarterly examines the New Zealand law and judicial decisions on the notion of fair value for minority shares. Specifically, the article focuses on a closely held or unlisted company and considers whether fair value of a minority stake should incorporate a discount from the pro rata value of the company’s equity considered as a whole.

In general, the universal principle is that fair value has to be equitable to the acquirer and the vendor, recognizing what the seller gives up in value and what the buyer receives through the share acquisition. However, in New Zealand, fair value is not a single valuation standard but a contextual assessment. The context and applicable constitutional New Zealand Companies Act requirements influence whether a discount ought to apply in determining the fair value for minority shares.

While the baseline position is that fair value may include a discount for minority interest there are contexts in New Zealand in which a discount would not apply. One is where a company’s constitution prescribes a formula to determine fair value and this is a pro rata value of the total value. Where a company’s constitution provides for an expert to determine fair value without being explicit on whether a discount applies, then the expert will have discretion in the decision.

In cases where directors are dealing in shares and have material inside information, section 149 of the New Zealand Companies Act of 1993 is relevant, and court decisions suggest a nuanced approach to the question of whether a minority discount applies. A minority discount may apply where the transaction is an open market consensual transaction and information relevant to the value of the shares has been disclosed. However, no discount is likely to apply in the case of a closely held company where shareholders have fallen out, or where the company constitution gives a minority greater than usual rights.

The New Zealand Companies Act of 1993 also considers fair value where minority buyout rights apply, and where a shareholder is oppressed, unfairly discriminated against, or unfairly prejudged. The Companies Act of 1993 and the court decisions typically conclude that fair value in these contexts is a pro rata value exclusive of a discount for minority shares.

These contextual applications aim to minimize positional bias and information asymmetry among specified participants.

*Lowenstein Sandler thanks Jai Basrur, John Land, and Jilnaught Wong of the University of Auckland Business School for their contribution to this blog. Lowenstein Sandler LLP does not practice in New Zealand.

The National Law Review has covered Mobile Posse, a case we’ve posted on before.  The NLR analysis describes the Mobile Posse decision, writing:

“The Court denied all but one of defendants’ motions, finding numerous deficiencies in the notice process and finding that the merger was not entirely fair.”

And further:

“The Court was not persuaded that a supplemental notice could serve as a replicated remedy, and in any event, the supplemental notice contained incorrect and internally inconsistent instructions. The supplemental notice provided stockholders with an incorrect time period for submitting their demand for appraisal, and it also provided the stockholders with the wrong procedures for enforcing their appraisal rights.”

Mobile Posse highlights an important aspect of Delaware appraisal rights, different from many other types of claims.  Whereas an (alleged) tortfeasor is obviously under no duty (usually) to inform others of their potential claims, appraisal is not a tort remedy, but a statutory right.  For appraisal, one can view it as: shareholder have the right to a fair notice that gives them the information they need to make an informed decision.  Setting aside debates about what information the shareholder needs, shareholder certainly have the right to a correct notice – and it can create issues if the company fails to provide one.

A recent alert by Lynda Bennett and Jason Meyers in Lowenstein’s Insurance Recovery Group discusses the Delaware Superior Court’s recent opinion that a “Securities Claim” in a D&O policy includes a shareholder appraisal action and coverage for prejudgment interest despite lack of insurer consent. Read the alert here.

Commentary on the recent Jarden decision has focused, unsurprisingly, on the use of unaffected stock price in the decision after some commentators viewed the methodology as dead after Aruba.  As a recap, unaffected stock price methodology involves determining the fair value of an acquired company using its stock price before the merger announcement.

Some commentary on Jarden:

But the National Law Review had a somewhat different take, cautioning against viewing one data point as the (re)start of a trend, writing “In general, Jarden demonstrates that, in statutory appraisal actions, the Court’s determination of fair value will remain primarily a fact-intensive inquiry involving consideration of different valuation methodologies, as appropriate.”

Blog World of Securities Regulation has this extensive breakdown of the recent Columbia Pipeline decision. The author notes that the Columbia Pipeline analysis goes through each factor, or sub-analysis, that the Delaware courts have considered relevant (to varying degrees) in appraisal proceedings recently. These include:

  • Sales process;
  • Deal price (and the reliability of it);
  • Synergies;
  • Signing-closing valuation increase;
  • Trading price (which the Court rejected);
  • The discounted cash flow methodologies of petitioners and respondents.

The post provides a comparatively short synopsis of an otherwise one-hundred-plus page decision.

Under Italian law a shareholder of a joint stock company can exercise the right to withdraw in the cases provided for by law (for the list of cases see art. 2437 Civil Code for shareholders of a company limited by shares (S.p.a.), art. 2473 Civil Code for quotaholders of a limited liability company ( S.r.l.) and art. 2497-quater for shareholders of companies subject to the direction and coordination of other companies).

When a shareholder exercises his right to withdraw from the company, he is entitled by law to obtain payment for his holdings in respect of which he is exercising it (art. 2473-ter Civil Code for S.p.a. and art. 2473 Civil Code for S.r.l.).

The value of the holding is established by the directors, having obtained the opinion of the board, of statutory auditors as well as the legal auditor of accounts and is established taking account:

  1. of the company’s equity;
  2. of its income producing prospects; as well as
  3. any market value it may have.

The company’s bylaws may also provide for other criteria to establish the value of the holding, indicating the asset and liability items that may be rectified with respect to the figures shown on the financial statements (together with the rectification criteria), as well as other possible elements, capable of being valued, to be taken into consideration.

Clauses in the bylaws which establish payment for the holding in an amount equal only to its nominal value or taking into consideration book value only are considered unlawful.

In practice, instead, clauses that establish the value of goodwill, measured according to mathematical calculations in relation to the profitability in previous financial years are held lawful.  This criterion is, in fact, in line with the condition of the assets organised in the company, the overall value of which is not the sum of the static value of the individual assets but is inevitably influenced by business continuity prospects (so-called going concern) (see Italian Court of Cassation, Civil Division, 15 July 2014, no. 16168).

For listed companies, the value of the shares is normally established by referring exclusively to the arithmetic average of closing prices in the six months preceding publication of the notice calling the shareholders’ meeting, the resolutions of which entitle the shareholder to withdraw.

In these types of company, the bylaws may provide that the value shall be established also according to criteria a), b), c) set forth above, but, in any event, such value cannot be lower than the value that would be due applying the criterion of the arithmetic average of the last closing prices described.

In the event of disagreement among the shareholders as to the value of the holding, the law provides as a remedy, that the value can be established through a Sworn Appraisal of an Expert, appointed by the Specialised Division of the Business Court, by application of the withdrawing shareholder.

In this case the Expert will draw up the appraisal according to the criteria established by law or by the bylaws, within the term fixed by the judge.

The Expert appointed to draw up the appraisal is true Auxiliary of the judge (according to art 68 of the Italian Code of Civil Procedure) and, by express provision of law, he draws up his Report in the capacity of arbitrator (see art 1349 of the Civil Code).

This means that he operates as a party appointed to establish the performance of a contract according to a valuation criterion inspired by contractual equity, which, in this case, performs a function of balancing out the economic interests in play.

Given that he is classified as an arbitrator, consequently there are few remedies to challenge his Report on the value of the holdings: his Report can in fact be challenged before the Court only if it is “manifestly inequitable or wrong”.

Payment for the holding in respect of which the withdrawal has been exercised must be made within the inderogable term of 180 days from the date upon which the declaration of the withdrawal reached the company.

Normally the payment will be made through purchase of the holding of the withdrawing shareholder by the other shareholders in proportion to their holdings, or by a third party identified by mutual agreement among the shareholders.

** Lowenstein Sandler LLP thanks Fiorella F. Alvino and Andrea Alberto Belloli of Nunziante Magrone for their contributions to this blog.

By a July 19, 2019 ruling, Vice Chancellor Slights set the fair value of Jarden Corporation at its unaffected market price of $48.31, below the $59.21 per share value of cash and stock that Newell Rubbermaid had paid to acquire it. The court also performed a DCF analysis that corroborated its valuation. The court was critical of the merger process leading up to this deal and questioned the reliability of a merger-price-less-synergies approach given that factor as well as its findings that there was no pre-signing or post-signing market check and the evidence regarding deal synergies and how much, if at all, was received by Jarden, was conflicting and especially difficult to measure.

We expect further analysis and commentary on this case to follow and will post as it comes in.