Recent Developments in Takeover and Squeeze-out Legislation in Austria

01 January 2007

After 18 years of discussions and a two-year transition period, each EU member state had to implement the EU Takeover Directive by May 2006. In connection with this implementation, the Austrian legislation on public takeovers and squeeze-out of minority shareholders has been significantly amended. As a consequence, the common structure of public takeover transactions followed by squeeze-outs has to be reconsidered.

INTRODUCTION


As early as 1985, the European Commission announced its intention to propose a directive on the approximation of EU member states’ legislation governing takeover bids. It took the member states more than 18 years to agree on the EU-Takeover Directive (2004/25/EC), which finally came into force on 20 May 2004 and which had to be implemented in each member state by 20 May 2006.


Agreement on the directive was only achieved as a result of a controversial compromise according to which two important provisions became optional: article 9 (2) and (3), which prohibits the target company from taking defensive actions to frustrate takeover bids without prior shareholder approval, and Article 11, which allows the bidder to breakthrough certain target company restrictions (eg transfer restrictions) to achieve full control of the target company.


Austria is one of only a handful of EU member states to have implemented the directive through the Takeover Act 2006 in time. The new Act entered into force on 20 May 2006.
The following provides an overview of important changes concerning takeover bids pursuant to the Takeover Act 2006 and the new regime for squeeze-outs of minority shareholders in Austria pursuant to the Squeeze-Out of Minority Shareholders
Act 2006.

 

TAKEOVER ACT 2006


The Austrian Takeover Act basically ensures that an entity or natural person (bidder) or parties acting in concert obtaining a controlling holding in a stock corporation, the shares of which are admitted to the official or semi-official market of the Viennan stock exchange, Wiener Börse (the target company) are obliged to offer shareholders’ all other shares in the target company (mandatory public bid). The mandatory public bid must be notified to the Takeover Commission and published within certain time limits.

Probably the most controversial issue of the old Takeover Act was the definition of a controlling holding that triggered the obligation to make a mandatory public bid: a holding of 20 per cent of the voting rights in the target company in connection with certain other vague (flexible) elements could constitute a rebuttable presumption that a controlling holding existed. This elastic definition of a controlling holding had an adverse effect on legal certainty for investors and empowered the Takeover Commission to decide on a case-by-case basis whether a holding of more than 20 per cent voting rights triggered the obligation to make a mandatory public bid.


With the introduction of the Takeover Act 2006, the flexible definition of a controlling holding has been abandoned, despite protests from the Takeover Commission. The threshold for a controlling holding has been adjusted to the same threshold as most other EU member states, ie, to a direct or indirect holding exceeding 30 per cent voting rights in the target company.

Further, a holding between 26 per cent and 30 per cent of voting rights in the target company will never trigger the obligation to make a mandatory public bid. However, this will lead to a statutory suspension of all voting rights exceeding 26 per cent provided that no other shareholder in the target company disposes of equivalent or more voting rights. Any shareholding between 26 per cent and 30 per cent in a target company has to be reported to the Takeover Commission within a certain period.

The Takeover Commission can rescind the suspension of voting rights upon application and can impose other conditions provided that the other (non-controlling) shareholders of the target company receive equal protection.


Pursuant to the old Takeover Act and as a result of Takeover Commission rulings, a controlling holding could be obtained not only actively by acquiring the relevant shareholding, but also passively, eg, where a shareholder remained with a controlling holding because another (controlling) shareholder divested its interest. This scenario was seen in the privatisation of Böhler Uddeholm AG, when the state-owned privatisation agency sold its controlling interest of approximately 25 per cent of voting rights in Böhler Uddeholm AG upon a secondary public offering and an investor group holding approx 23 per cent of the voting rights remained with a controlling holding. After the Takeover Commission ruled that the investor group must make a mandatory public bid, the investor group reduced their voting rights in Böhler Uddeholm AG to avoid such a bid. The investors’ group however appealed the Takeover Commission’s ruling but no final decision has yet been made.


The Austrian legislature resolved this issue in the Takeover Act 2006 to the effect that a shareholder that passively gains a controlling holding in a target company does not have to make a mandatory public bid, if it could not reasonably have expected to obtain such control at the time of acquisition. Nevertheless, the above-mentioned limitation of a maximum of 26 per cent of the voting rights and the notification requirement to the Takeover Commission will apply.


The minimum price of a mandatory public bid must be the higher of:

  • the average price quoted for shares in the target company during the preceding six months, and
  • the highest consideration for shares in the target company paid or promised by the bidder (or any party acting in concert) within the preceding 12 months.


The possibility of a 15 per cent discount on the highest consideration paid to acquire a controlling holding – which was possible pursuant to the old Takeover Act – has been abolished to secure equal treatment of all shareholders of the target company.


The bidder must offer to purchase all other shareholders shares in the target company for a consideration in cash; in addition the bidder may offer a (higher) share alternative.


If, within a period of nine months after the mandatory public bid, the bidder acquires additional shares in the target company for a higher consideration than offered in its bid, the bidder must pay all shareholders who accepted the bid further payment amounting to the difference to the price offered in the bid.


With regard to defence measures of the target company, the Austrian legislature did not exercise the opt-out option permitted by the EU Takeover Directive. Consequently, the Takeover Act 2006 prohibits the target company, as from the time the target company receives information about the intention of a bidder to make a mandatory public bid from taking defensive action to frustrate the bid without the prior approval of the general assembly, except to search for a ‘White Knight’.


With regard to the breakthrough provisions, pursuant to which a bidder is entitled to break through certain target company restrictions, the Austrian legislature decided to exercise the option set out in the EU Takeover Directive and opted out (see introduction above). Consequently, a breakthrough is not provided by statute, however, stock corporations may provide in their articles of association that, if a mandatory public bid has been published, restrictions on the transfer of shares or restrictions on voting rights do not apply, irrespective of whether such restrictions have been provided for in the companies’ articles of association or in any other agreement among the shareholders (eg, syndication agreements), which must not have been concluded before 30 March 2004 (the date of EU Takeover Directive). Further, a bidder acquiring more than 75 per cent of the share capital of the target company shall have the right to call a general assembly on short notice. In such an assembly, restrictions of voting rights shall not apply. The Austrian Takeover Commission publishes on its homepage (www.takeover.at) a list of companies that provide for such breakthrough regulations in their articles of association. However, to date no company has been listed by the Takeover Commission.

 

ACT ON SQUEEZE-OUT OF MINORITY SHAREHOLDERS 2006

 


The new Act on Squeeze-Out of Minority Shareholders 2006 (Squeeze-Out Act 2006) replaces current legislation on the squeeze-out of minority shareholders in Austria, which basically allows a squeeze-out under certain circumstances by way of a spin-off of the minority shareholder into a newly established (cash box) company pursuant to the Act on Demerger or by way of a specific merger between the majority shareholder and the company according to the Act on Reorganisation.


The main principles of the old squeeze-out legislation in Austria were as follows:

  • a shareholders’ resolution with the consent of 75 per cent of the voting rights and 90 per cent of the issued share capital of the company is required;
  • cash compensation must be available for all or dissenting shareholders;
  • the amount of the cash compensation can be challenged;
  • the assets of the company are split-off and must be (partially) transferred by way of universal succession.


The Squeeze-Out Act 2006 proposes a consistent regime for squeeze-out of minority shareholders to replace the current legislation. The new Act shall apply to stock corporations and private limited companies.


Instead of a split-off or merger of company assets, the Squeeze-Out Act 2006 entitles the majority shareholder to propose the passing of a resolution on the squeeze-out of the minority shareholders on the level of shareholdings to the shareholders’ assembly. Consequently, if such a resolution is passed and registered on the Commercial Register, the minority shareholders’ shares are automatically transferred to the majority shareholder for adequate cash compensation. The shareholders’ resolution can be passed with a simple majority.
To qualify as a majority shareholder, the shareholder (including its affiliated companies) must hold at least 90 per cent of the issued share capital of the company.


Prior to the shareholders’ assembly, the company’s management board and majority shareholder together have to provide a report on the envisaged squeeze-out. This report must include the proposed cash compensation for the minority shareholder, as well as a statement regarding the adequacy of the cash compensation.


Further, the adequacy of the cash compensation has to be reviewed by an expert, who shall be appointed by the competent court upon request of the management board and the majority shareholder.


At least one month prior to the date of the general assembly, the management board must publish a notice regarding the envisaged shareholders’ resolution in the Official Gazette. In addition, specific information regarding the squeeze-out must be made available for shareholders at the company’s registered office (eg, the report of the management board and majority shareholders, the expert’s report, annual statements, etc).


With regard to the payment of the cash compensation, the majority shareholder must either deposit the cash compensation with a trustee or provide a bank guarantee for the respective amount one day after the general assembly has passed the resolution. Compensation shall be due two months after registration and publication of the squeeze-out on the Commercial Register, and will become time-barred three years thereafter.


After registration of the squeeze-out, any minority shareholder may request the competent court to review the adequacy of the cash compensation pursuant to the existing regulations for the review of cash compensations, with regard to
company mergers according to the Stock Corporation Act.


As the new act does not set out guidelines for the cash compensation, except for squeeze-outs following a mandatory public bid, the existing uncertainty with regard to cash compensation will remain and further disputes on this issue can be expected. For a squeeze-out following a mandatory public bid according to the Takeover Act 2006, the cash compensation shall be deemed inadequate if it is lower than the cash compensation offered in the mandatory public bid. If the mandatory public bid has been accepted to the extent that the bidder acquires 90 per cent of the outstanding shares of the target company, a cash compensation equal to the cash compensation offered in the bid is deemed to be adequate.