Cash settlement under squeeze-out

In its decision dated 15 October 2015 (file no. 403 HKO 42/14) the Hamburg Regional Court had to rule on the appropriateness of a cash settlement paid to the minority stockholders of a stock corporation (Aktiengesellschaft) in the context of a squeeze-out.

Sec. 327a German Stock Corporation Act (Aktiengesetz, AktG) allows the main stockholder to exclude the minority stockholders and take over their stocks in accordance with the provisions stipulated therein. For this, the minority stockholders have to be granted a cash settlement that has to be appropriate and with regard to its amount verifiable by court upon request (Sections 327b, 327f AktG).

In its decision the Regional Court clearly states the principles set forth by the Federal Constitutional Court (Bundesverfassungsgericht) and the Federal Court of Justice (Bundesgerichtshof) that have effect on evaluating whether a cash settlement within the meaning of Sections 327a Subsec. 1, 327f Sent. 1 AktG is appropriate.

It needs to be considered that these regulations, which are intended to ensure an appropriate compensation for the minority stockholders, are to be understood and interpreted against the background of a property guarantee under Art. 14 Basic Law for the Federal Republic of Germany (Grundgesetz, GG). Property protected by Art. 14 para. 1 GG includes the property embodied in the stock, which provides the stockholder with a member status and bestows powers of direction and proprietory rights upon the stockholder. A stockholder losing such legal status protected by constitutional law in the course of a stock restructuring measure must be fully compensated for losing this legal status and the detrimental effects on his or her proprietary status by economic means. The compensation must reflect the “real” and “true” value of the stock property.

As a rule, the Stock Exchange price constitutes the lower limit of the cash settlement in the respective evaluation carried out. This is based on the deliberation that in most cases the Stock Exchange price determined by supply and demand reflects the market value, which, in turn, constitutes the lower limit of the full economic compensation. However, if by way of exception the Stock Exchange price is not equal to the market value - which was the case in the matter decided upon - the market value of the company must be determined by way of estimating in accordance with Sec. 287 Subsec. 2 Code of Civil Procedure (Zivilprozessordnung, ZPO) using recognized business methods. In this case, the income capitalisation approach was used.

In the present case, by way of exception the Stock Exchange price was not an appropriate indicator for the market value, as these stocks had not been traded sufficiently.

The Stock Exchange price shall explicitly only be considered the lower limit for an appropriate compensation, as supported by the Federal Constitutional Court and the Federal Court of Justice, if the Stock Exchange price really reflects the market price. This will mostly be the case as it can be assumed that the stock market evaluates the true earning power of the corporation whose stocks are concerned on the basis of the information provided, the acquirers of stocks orient themselves on the market evaluation, and supply and demand adjust themselves to the extent that the market movement is reflected in the Stock Exchange rate. However, these conditions can be absent in case of a narrowness of the market, which results from eg a few people holding on to the majority of the stocks and not offering them for sale. Then it is unclear whether the minority stockholder could really have sold his or her stocks for the Stock Exchange price.

As was the case here. In the relevant reference period set by the Federal Court of Justice - turnover weighted average in the three months preceding the communication of the restructuring measure - no stocks had been traded. According to the Regional Court it was evident that under these circumstances it could not be assumed that the Stock Exchange price had resulted from a free interplay of supply and demand and an evaluation in undistorted markets.