The rationale behind the institution of compulsory share buy-out is to provide majority shareholders with the legal means to deprive minority shareholders of their shareholding rights in the company. In business practice, situations arise in many joint-stock companies where minority shareholders abuse their rights, in particular by taking actions leading to challenges against resolutions adopted by the general meeting of shareholders. In such cases, a squeeze-out becomes a means of depriving minority shareholders of their influence over the functioning of the joint-stock company.
The scope of the compulsory share buy-out covers the shares of the joint-stock company held by minority shareholders. The squeeze-out procedure does not cover shares issued by public companies, to which separate legal regulations apply in the context of compulsory buy-out, namely the Act of 29 July 2005 on Public Offerings and the Conditions for Introducing Financial Instruments to an Organised Trading System and on Public Companies (i.e. Journal of Laws of 2024, item 620, as amended), as well as shares held by the State Treasury in companies established as a result of the commercialisation of state-owned enterprises carried out after the entry into force of the Act of 30 August 1996 on the commercialisation and certain rights of employees (i.e. Journal of Laws of 2024, item 1198, as amended) and shares held by employees of companies pursuant to the aforementioned Act of 30 August 1996 on the commercialisation and certain rights of employees during the period in which, by virtue of the Act, they are not subject to disposal. As a general rule, a statutory restriction on the disposal of shares (so-called ‘locked-up shares’), as well as a pledge or usufruct right attached to the shares, does not affect the compulsory buy-out of shares.
The squeeze-out procedure is initiated by the majority shareholders of a joint-stock company who hold at least 95% of the share capital. The majority shareholders may carry out a compulsory buy-out if each of them holds a stake in the share capital of the joint-stock company of not less than 5% of the share capital, and collectively not less than 95% of the share capital. The company’s management board plays a significant role in the compulsory buy-out process; upon payment of the buy-out price, it must immediately transfer the repurchased shares to the purchasers.
The content of Article 418 of the Commercial Companies Code sets out the chronological sequence of events leading to the compulsory buy-out of shares held by minority shareholders. The squeeze-out procedure consists of:
- the adoption of a resolution on the compulsory buy-out of shares,
- the opportunity for minority shareholders not covered by the buy-out to submit a buy-out request pursuant to the resolution,
- determination of the buy-out price,
- the submission of share certificates or proof of their submission to the company by shareholders whose shares are subject to the buy-out,
- payment of the buy-out price,
- acquisition of the shares subject to the buy-out and payment of the purchase price.
The squeeze-out procedure is initiated by a resolution on the compulsory buy-out of shares. A resolution on the compulsory buy-out of shares does not constitute an amendment to the articles of association; therefore, it is not necessary to file it with the register for it to be effective. A key feature of the squeeze-outis the possibility of utilising this mechanism regardless of the motives of the majority shareholders carrying out the buy-out, and even more so regardless of whether the disclosed or presumed motives merit approval; consequently, there is no obligation to provide a justification for adopting the resolution.
Pursuant to Article 418(2) of the Commercial Companies Code, a resolution on a compulsory buy-out must specify: the shares subject to buy-out, the shareholders undertaking to buy out the shares, and the shares allocated to each purchaser. Furthermore, all shareholders who are to acquire the shares and who voted in favour of the resolution are jointly and severally liable to the company for the payment of the full redemption amount. A resolution on compulsory redemption is adopted by a qualified majority of 95% of the votes cast. However, Article 418(1) of the Commercial Companies Code does not specify the quorum required to adopt such a resolution. Article 418(1) of the Commercial Companies Code expressly permits the articles of association to stipulate stricter requirements for the adoption of a resolution on compulsory buy-out.
A resolution on compulsory buy-out may be challenged both under Article 422 of the Commercial Companies Code and under Article 425 of the Commercial Companies Code, by the shareholders affected by the buy-out as well as by other shareholders. Challenging the resolution does not suspend the compulsory buy-out procedure, but a successful claim will compel the company to restore the situation as if the compulsory buy-out had not taken place.
A key element of the compulsory buy-out procedure for shares held by minority shareholders is the determination of the buy-out price. The squeeze-out procedure assumes that a shareholder whose shares are subject to compulsory buy-out should receive a sum for their shares corresponding to their actual market price.
The buy-out price is determined by an expert appointed by the general meeting or the registry court. The expert sets a fair price for the shares. Furthermore**, minority shareholders** have the right to apply to the court to have the determined buy-out price reviewed.
It should be noted that the general meeting’s resolution on the appointment of an expert is adopted by an absolute majority of votes, unless the articles of association provide otherwise, in a secret ballot.
The share price determined by the expert must be published in the Court and Economic Monitor or at a general meeting. This cannot be the same meeting at which the resolution on compulsory redemption is passed. Any contrary position is inconsistent with the literal wording of Article 417 § 1 of the Commercial Companies Code, which provides for the following sequence of events: the appointment of an expert by the general meeting; the valuation of the shares by the expert, who only acquires the necessary authority from the moment of appointment; and the announcement of the buy-out price. Consequently, minority shareholders cannot challenge the resolution on compulsory redemption on the grounds of an inappropriate price, as that price – at the time the resolution is adopted – is not yet known.
Once the buy-out price has been determined and announced, shareholders who are to sell their shares are obliged to pay the full buy-out sum into the company’s bank account. Payment must be made within a strict deadline of three weeks from the date of the announcement of the buy-out price. Failure to make payment within this period results in the compulsory buy-out not taking effect.
Purchasers are entered in the register of shareholders only after the full redemption amount has been paid. Purchasers may only be existing shareholders who have been identified in the resolution on compulsory redemption.
Shareholders obliged to purchase shares shall acquire the shares subject to compulsory redemption, with the participation of the management board, in two stages. In the first stage, share transfer agreements are concluded between the company and the shareholders whose shares are being repurchased, under which the company acquires the shares in its own name but for the account of the shareholders who have undertaken to purchase the shares. Following the conclusion of these agreements, the company must in turn transfer the acquired shares to the shareholders obliged to purchase them. Until the full redemption amount has been paid, minority shareholders retain all rights attached to the shares. These shares will therefore have the status of the company’s own shares during the period between the payment of the full redemption amount and the moment of transfer to the redeeming shareholders.
The share buy-back, at the price resulting from the valuation, is carried out by the company in its own name but on behalf of the shareholders obliged to sell. As indicated above, the condition for the buy-back, and thus the validity of the resolution on compulsory buy-back, is the payment of the buy-back price into the company’s account. If no shares are repurchased, the resolution on compulsory repurchase will not be effective. It should be noted here that in such a situation, the agreements for the acquisition of shares by the company are also ineffective, and consequently so are the corresponding notifications of share acquisition by the shareholders obliged to sell. The transfer of shares to the shareholders obliged to sell will take place on the basis of agreements concluded with the company and entries in the register of shareholders.
It is also worth noting here that Article 418(2b) of the Commercial Companies Code regulates the so-called ‘reverse squeeze-out’, i.e. a reverse compulsory buy-out. This mechanism essentially grants a minority shareholder, whose shares were not covered by the resolution on compulsory buy-out, the right to demand that their shares be bought out by the majority shareholders. Reverse squeeze-out enables minority shareholders to leave a company where a squeeze-out has taken place. Minority shareholders present at the general meeting should submit their request within two days of the general meeting, and those absent – within one month of the announcement of the squeeze-out resolution. Failure to submit this request within the deadline is treated as consent to remain in the company. Importantly, the Act makes the validity of the resolution on the compulsory buy-out of shares contingent upon the buy-out of shares tendered for buy-out by minority shareholders whose shares were not covered by the resolution.
In summary, it should be noted that the procedure for the compulsory buy-out of shares in a joint-stock company consists of many stages and requires careful action and due diligence. The initiation of a squeeze-out procedure is very often accompanied by a tense atmosphere within the company and conflicts between shareholders. In such procedures, given the multitude of steps required, even the slightest oversight may lead to the resolution on compulsory buy-out being set aside or declared invalid. Incidentally, it is worth noting that under the Act of 9 February 2022 amending the Commercial Companies Code and certain other acts, new provisions regarding the procedure for the compulsory buy-out of shares or equity interests in capital groups will come into force on 13 October 2022. Until now, the squeeze-out procedure applied exclusively to public limited companies. The provisions of the new holding company law, which come into force on 13 October 2022, introduce additional options for demanding the buy-out and repurchase of shares, as they also apply to limited liability companies participating in a group of companies.
He gained his professional experience in one of Lublin's renowned law firms, dealing with civil and business law in its broadest sense. At the law firm Hewelt Wojnowski i Wspólnicy spółka komandytowa, he deals on a daily basis with current counseling in the field of business and the development of corporate documentation of companies, such as. Company agreements, bylaws of company bodies, agreements regulating relations between shareholders, resolutions of company bodies, M&A transactions. In addition to…
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