Companies Act 2006 - Squeeze-Out Sell-Out

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Sections 969 and 972: Power of offeror to require general meeting to be called; Transitory provision

1241. Section 969 provides the bidder with the special right to require the directors of an opted-in company to call a general meeting of the company when he holds 75% in value of all the voting shares in the company (excluding debentures and shares that do not normally carry rights to vote at a general meeting (such as preference shares)). Section 969(3) applies sections 303 to 305 of the Act, which deal with the calling of meetings, to such a request (with the necessary modifications). But as those sections may not be in force at the time when section 969 comes into force, section 972 makes the same sort of adaptations in relation to the equivalent provisions of the 1985 Act. In particular, section 972(3) alters the application of section 378(2) so that a special resolution may still be passed at a general meeting called at only 14 days’ notice (normally at least 21 days’ notice would have to be given of the meeting for it to be able to pass a special resolution).


Summary and background

1242. The concepts of “squeeze-out” and “sell-out” are designed to address the problems of, and for, residual minority shareholders following a successful takeover bid. Squeeze-out rights enable a successful bidder to compulsorily purchase the shares of remaining minority shareholders who have not accepted the bid. Sell-out rights enable minority shareholders, in the wake of such a bid, to require the majority shareholder to purchase their shares. Because they involve the compulsory purchase or acquisition of shares against the will of the holder of the shares or the acquirer, high thresholds apply to the exercising of such rights and there are protective rules on the price that must be paid for the shares concerned.

1243. Squeeze-out and sell-out provisions have been a feature of national company law for many years (and were previously contained in Part 13A (Takeover Offers) of the 1985 Act). Articles 15 and 16 of the Takeovers Directive, however, introduce EU-wide rules requiring all Member States to put appropriate provisions in place for the first time. The provisions at sections 974 to 991 of the Act restate Part 13A of the 1985 Act in a clearer form. However, in doing so they also make important changes to reflect the need to ensure compliance with the Directive and the decision to accept some recommendations of the CLR. These are described below.

Detail of changes made to the operation of provisions previously contained in Part 13A of the 1985 Act

1244. The rules laid down in the Directive in relation to squeeze-out and sell-out are broadly consistent with provisions of Part 13A (sections 428 to 430F) of the 1985 Act. The restated and amended provisions will apply equally to all companies and all bids within the ambit of Part 13A of the 1985 Act, regardless of whether or not the Directive is required to be applied to such companies and bids.

1245. The following changes are made in implementation of the Directive:

• Calculation of Squeeze-out Threshold (section 979) – there is a dual test imposed: in order to acquire the minority shareholder’s shares, the bidder must have acquired both 90% of the shares to which the offer relates, and 90% of the voting rights carried by those shares. Where the offer relates to shares of different classes, then, in order to acquire the remaining shares in a class, the bidder must have acquired 90% of the shares of that class to which the offer relates, and 90% of the voting rights carried by those shares. Under section 429 of the 1985 Act, in each case only the first limb of that test applied.

• Calculation of Sell-out Threshold (section 983) – mirroring the change to be made in relation to the squeeze-out threshold, a dual test is similarly imposed in relation to the sell-out threshold, so that a minority shareholder may force a bidder to acquire his shares (i) when the bidder holds 90% of the shares in the company, and 90% of the voting rights attached to those shares, or (ii) when the bidder holds 90% of the shares in the class to which the minority shareholder’s shares belong, and 90% of the voting rights attached to those shares. Under section 430A of the 1985 Act, the test was that the bidder should have acquired 90% of all shares in the company (or in the class concerned).

• Revised Period during which Squeeze-Out and Sell-Out Rights may be Exercised (section 980(2)) – the Directive provides (Articles 15.4 and 16.3) that squeeze-out and sell-out rights must be exercisable within a three month period following the time allowed for acceptance of the bid. Section 429(3) of the 1985 Act provided that squeeze-out could be exercised within a period of four months beginning with the date of the offer and had to be exercised within two months of reaching the 90% threshold. Accordingly, the rule provided by the Directive is substituted for the rule in the 1985 Act. An exception to this rule is provided where takeover bids are not subject to the Directive, for instance takeovers of most private companies. In these cases, the squeeze-out notices must be given within six months of the date of the offer if this is earlier than the period ending three months after the end of the offer. This is intended to prevent offerors in such circumstances continually extending the offer period. A change is also made as regards the period during which sell-out may be exercisable so that this period is to be either three months from the end of the offer or, if later, three months from the notice given to the shareholder of his right to exercise sell-out rights (section 984(2)). An extended period during which the sell-out right can be exercised where notice of such a right is only given after the end of the offer period is consistent with provisions of the Directive allowing more stringent provisions to be put in place (in this case to ensure the proper protection of minority shareholders).

• The court will no longer be able to reduce the consideration in relation to squeeze-out or sell-out following a takeover bid to below the consideration offered in the bid (which the Takeovers Directive presumes to be fair in all cases). Again utilising provisions of the Directive which allow more stringent provisions to be included to protect minority shareholders, minority shareholders will continue to be able to apply to the court to request that consideration higher than that offered in the bid be paid in exceptional circumstances (section 986(4)).

1246. In most instances, it is considered that the first and second changes above will make no practical difference as the percentage of total capital carrying voting rights in a company (or class of shares) and the percentage of voting rights will normally be the same. The provisions about voting rights will not apply where the shares being squeezed out or sold out are non-voting shares.

1247. The CLR also considered the issue of squeeze-out and sell-out and the scope for improving the provisions in the 1985 Act. Its Final Report (chapter 13, pages 282 – 300), made a number of recommendations in relation to the reform of the squeeze-out and sell-out regime. Some of these recommendations are closely related to implementation of the Takeovers Directive. For instance, the CLR questioned whether, in calculating the relevant squeeze-out and sell-out thresholds, only shares that had been unconditionally acquired should be taken into account or whether shares acquired subject to contract should also be included.

1248. In implementing the Takeovers Directive, the opportunity is being taken to adopt recommendations of the CLR, whether or not related to implementation of the Directive, except to the extent that they are not consistent with Articles 15 and 16 of the Directive or are no longer appropriate as a consequence of the Directive. The recommendations made by the CLR implemented by Chapter 3 of Part 28 are set out: