Squeeze-Outs and Sell-Outs

How To Remove Minority Shareholders

Purchasing a company involves exceptional due diligence and relationship building. However, one thing that can hold up even the strongest takeover offer is when minority shareholders refuse to accept the deal.

Certain shareholders may dislike the offer and choose not to accept it. Others may have ignored the paperwork or have been missed off the mailing list. And some members may be untraceable.

The Companies Act 2006 (CA 2006) contains provisions enabling or requiring a takeover offeror to acquire shares of the target company from shareholders who have not accepted the offer. These provisions are referred to as:

• Squeeze-outs – an offeror has the right to compulsorily purchase the shares of non-assenting shareholders.
• Sell-outs: the non-assenting shareholders’ rights to require the offeror to purchase their shares.

Why is it necessary to remove minority shareholders?

Dissenting minority shareholders can cause significant problems for an offeror because:

• Unless the offeror achieves a shareholding of 75% or more, it may not be able to pass a special resolution.
• A 75% or more holding is required to incorporate the target company into its UK tax grouping for certain tax and stamp duty reliefs.
• Merger relief will only apply if the offeror has a 90% shareholding.
• An offeror can only call a general meeting at short notice if it holds 90% of the shares in a private company or 95% if the target company is public.
• Any minority interest may need to be considered when structuring intra-group transactions following the offer.
• Disgruntled minority shareholders can disrupt company business and cause reputational damage.

Dissenting shareholders can also suffer disadvantages in takeover situations. If the target company does not keep its public listing, minority shareholders may discover no one wants to purchase their shares. If this happens, they can be left with only the negative protections against unfair prejudice under section 994 of the CA 2006 and minority shareholder rights at common law.

How do squeeze-outs and sell-outs work?

In a squeeze-out, section 979 of the CA 2006 allows the offeror in a takeover bid to buy the shares of minority shareholders if they have acquired:

(a) not less than 90% in value of the shares to which the offer relates, and

(b) in a case where the shares to which the offer relates are voting shares, not less than 90% of the voting rights carried by those shares.”

If these conditions are met, the offeror can force minority shareholders to transfer their securities at the price offered in the takeover bid.

It is crucial to note that section 979 only applies if there is a takeover offer. A takeover offer must:

• Include an offer for the entire share capital of the target company or, if the target’s share capital is divided into classes, all the shares of the particular class which is the subject of the offer.
• Aside from a few exceptions, offer the same terms to all shareholders (or shareholders of the relevant class).

The offeror must activate the compulsory squeeze-out procedure within three months of the last day on which the offer can be undertaken. The procedure is initiated by the offeror serving notice to those members who have not accepted the offer.

Can a minority shareholder challenge a squeeze-out?

Once notice under section 979 is served a minority shareholder has six weeks to apply to the Court for a declaration that either:

1. The offeror is not entitled to their shares, or
2. The different terms on which the shares can be purchased.

If the 90% threshold has been reached, it will be difficult for a minority shareholder to prevent compulsory acquisition of their shares. But if they can prove, on the balance of probabilities, that the offeror breached the principles set out in the City Code on Takeovers and Mergers (also known as The Takeover Code) or there are special or unusual circumstances that mean a decision should be made in their favour, the Court may allow the application.

What are sell-out rights?

Section 983 of the CA 2006 provides that if an offeror holds 90% or more of all the shares in the target company (or if the offer relates to a class of target company shares, 90% of all the shares in that class) and those shares carry not less than 90% of the voting rights in the target, then a minority shareholder may require the bidder to acquire its shares.

The offeror must give formal notice that they have the right to request their shares be purchased by the offeror within one month of the 90% threshold being reached. If the sell-out notice is given before the end of the period within which the takeover offer can be accepted, it must state that the sell-out offer is still open for acceptance.

A sell-out notice does not have to be given if the shareholder in question has already been provided with a squeeze-out notice.

Concluding comments

Squeeze-outs and sell-outs can present serious complications in takeover bids, and failing to give minority shareholders notice at the right time can be an offence. The best way to protect your interests is to work with an experienced Shareholders Disputes Solicitor who can guide you through this and other complex matters associated with takeover bids.

To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

Note: The points in this article reflect sanctions in place at the time of writing, 21^st October 2024. This article does not constitute legal advice. For further information, please contact our London office.