New 90% threshold to implement a squeeze-out threshold: good news for financial markets, from IPO to PtoP
Stock exchange markets are one of the traditional tools available to French companies to finance their growth and development. However, this source of financing has significantly slowed down in recent years, with a drastic reduction in the number of IPOs and capital raisings on French markets. In addition to economic conditions and high price volatility, the difficulty to implement a squeeze-out procedure for a listed company is often seen as one of the reasons for this slowdown.
The squeeze-out procedure entitles the majority shareholder of a listed company to automatically acquire ownership of shares held by minority shareholders after a tender offer. This operates as a drag along right similar to the mechanisms frequently provided for private companies in shareholders' agreements. In order to protect the rights of minority shareholders, the conditions to implement this squeeze out mechanism are nevertheless very restrictive under French law, since such minority shareholders must not hold more than 5% of the capital or voting rights.
In recent years, a blocking strategy has been developed, mainly by activist funds, by acquiring securities to prevent a squeeze-out in order to obtain an increase in offer price from the bidder. Failure to implement a squeeze-out will have significant adverse effects for the controlling shareholder, in terms of implementation of synergies, dividend payment capacities and impossibility to benefit from a tax consolidation regime. These obstacles constitute a major hurdle to many public M&A projects, especially for private equity funds, and have a negative impact on the valuation of listed companies and the attractiveness of financial markets, since M&A transactions generally offer significant premium to the shareholders of the target company.
In this context the PACTE law, adopted by French parliament on 11 April 2019, which came into force on May 23, 2019, lowers the threshold required to implement a mandatory squeeze-out for companies. New Article L. 433-4 II of the French Monetary and Financial Code provides that, at the end of any tender offer, shares which have not been tendered, as long as they do not represent more than 10% of the share capital and voting rights - now cumulative and no longer alternative thresholds - are automatically transferred to majority shareholders at their request, in exchange for compensation.
In order to ensure the protection of minority shareholders, the compensation is equal to the price offered at the time of the last tender offer or, absent any such offer, to a valuation carried out pursuant to usual financial methods. In addition, except when the bidder does not hold the majority of the share capital or voting right prior to launching a tender offer, an independent financial expert must be appointed by the target company to issue a fairness opinion on the price offered to minority shareholders in connection with the squeeze-out.
French legislation therefore uses the flexibility proposed by the prospectus directive of 21 April 2004 and is in line with the 90% threshold provided for by the majority of European Union countries.1
Public-to-private delisting operations should therefore grow with buyers, both industrial and investment funds, looking for opportunities for strategic M&A deals.
1) The mandatory squeeze-out threshold is now 90% in all European Union countries except Luxembourg, the Netherlands, Italy and Lithuania.