In a recent decision, the German Federal Court of Justice (Bundesgerichtshof, BGH) abandoned its previous holding whereby, in the event of a delisting, the outstanding minority shareholders could demand cash compensation for their shares from the majority shareholders or the stock corporation itself. Subsequently, there will be no judicial award assessment procedure that, in practice, typically followed the compensation offer for the purpose of a judicial review of the compensation amount. Stock corporations and their majority shareholders are now able to undertake a delisting under considerably simplified conditions.
Previous legal position – “Macrotron”
According to the previously applicable “Macrotron” decision by the BGH, stock corporations had to undergo a complicated, time-consuming and costly procedure for a regular delisting (revocation of admission of shares to trading on the regulated market). The consequence of this ruling was that, on the one hand, the general meeting had to pass a resolution on the delisting with a qualified majority and, on the other hand, the stock corporation itself or its majority shareholders had to present the outstanding minority shareholders with a compensation offer as settlement for the loss of the tradability of their shares on the stock exchange.
The obligation to pay compensation entailed a significant financial burden, which neither the company nor the majority shareholders were able to or wanted to bear. Additionally, the requirement to make a compensation offer and the issue of the adequacy of the compensation offered always posed the risk of a judicial review. These legal and practical uncertainties meant that the way to a regular delisting was often, in practice, unavailable. Consequently, listed companies frequently tried to achieve delisting by way of a squeeze out. This requires, however, that the main shareholder holds at least 95% of the shares.
New legal position – “Frosta”
In a decision dated 8 October 2013 (“Frosta”), the BGH abandoned this case law, which had been in effect for more than ten years. In so doing, the BGH aligns its case law with the legal position of the German Federal Constitutional Court (Bundesverfassungsgericht). In a recent decision in 2012, the German Federal Constitutional Court held that a stock exchange listing is of no value to shareholders in itself and, consequently, a downlisting or delisting does not interfere with a shareholder’s property rights.
The “Frosta” case, now decided by the BGH, involved the so-called “downlisting” of a German stock corporation (Aktiengesellschaft) from the regulated market to the Entry Standard (Open Market) of the Frankfurt Stock Exchange. The decision to downlist was determined solely by the management board with the supervisory board’s approval. In addition, a compensation offer was not made to the minority shareholders. Consequently, shareholders demanded a ruling for adequate cash compensation. The BGH agreed with the legal position of the company and ruled that neither a corresponding resolution by the general meeting nor a mandatory offer to the minority shareholders to purchase the shares was required.
Outlook and consequences in practice
The BGH makes clear – including even beyond the particular facts of the decided case – that neither a downlisting nor a (full) delisting requires a resolution by the company’s general meeting or a compensation offer to the minority shareholders. As before, however, in order to avoid breaching its duties, the management board and the supervisory board must still consider whether a downlisting or delisting is in the company’s best interests.
As a result, minority shareholders are not assured that their shares will continue to be listed on the stock exchange. However, if necessary, they may invoke the provisions of the German Stock Exchange Act (Börsengesetz) and provisions based on it. The rules of the German stock exchanges state in this regard that shares are delisted no earlier than six months after the application for delisting has been made to the stock exchange. The BGH considers this to be adequate protection for minority shareholders, as they have enough time to sell their shares on the stock exchange during this period of time.
This decision paves the way for German stock corporations and their majority shareholders to downlist or delist significantly faster, under clear rules and in a more cost-efficient manner. This creates new strategic options for takeovers of listed companies, for example, by private equity investors. In particular, the so-called “taking private” – the practice of ceasing the listing of a company on the stock exchange, initiated by a majority shareholder – may now be a structural alternative worthy of serious consideration. Moreover, the decision is of particular importance for companies that are considering a delisting because the advantages of being listed on the stock exchange no longer outweigh the transparency and reporting requirements and costs associated with stock exchange listing. For these companies, the new ruling allows for a simple withdrawal from the stock exchange. This could be particularly favorable for companies for which a squeeze out, which is subject to the requirement of a 95% majority shareholder, is not possible.