Cash Settlements in the Event of a Squeeze-out

The cash settlement to be paid to minority shareholders in the event of a squeeze-out is calculated on the basis of the capitalised value of the company in question. Even in those cases in which the company concerned is subject to an ongoing profit transfer obligation pursuant to an existing intercompany agreement, the cash value of the compensation pursuant to that intercompany agreement is not the decisive factor. Irrespective thereof, the weighted three-month average share price is generally the lower limit.

Background

KERAMAG Keramische Werke AG is a long-established German manufacturer of sanitary ware. Since 1968, the company belongs to the French Allia Group, which in turn has been part of the Geberit Group since the beginning of the 1990s. The principal shareholder of KERAMAG AG is Allia Holding GmbH, with which a control and profit transfer agreement was concluded in November 2005. Pursuant to this agreement, Allia Holding GmbH was obligated to pay the external shareholders of KERAMAG AG a settlement in the amount of EUR 4.15 per share, per financial year.

In August 2007, the Annual General Meeting of KERAMAG AG resolved to transfer the shares of the minority shareholders to Allia Holding GmbH, which in the meantime held 95.54% of the shares (a so-called squeeze-out). Given that the capitalised value per share calculated by the valuation experts and the court-appointed expert was significantly lower than the stock exchange price, the decision provided for a cash settlement in line with the stock exchange price, i.e. EUR 66.36 per share.

A number of minority shareholders filed a petition to have the court determine a reasonable cash settlement by way of a shareholder compensation claim (Spruchverfahren). The petition was dismissed as unfounded by the Regional Court (Landgericht – “LG”) of Dusseldorf. It thus fell to the Higher Regional Court (Oberlandesgericht – “OLG”) of Dusseldorf to resolve upon the appeal against the decision of the Regional Court which was immediately brought by the applicants.

The applicants contended, among other things, that the cash settlement in the present case should be calculated not on the basis of the company’s capitalised value, but solely with reference to the net present value of the compensatory payments provided for in the intercompany agreement. Such “capitalised compensation payment” was higher than the stock exchange price and should thus be applied as the lower limit.

The ruling of the OLG Dusseldorf dated 11 May 2015, case reference: I-26 W 2/13

The objections put forward by the applicants were unsuccessful. The OLG Dusseldorf held that, also in cases in which a squeeze-out follows the conclusion of a control and profit transfer agreement, the amount of the settlement to be paid to the minority shareholders is generally not calculated on the basis of the cash value of the compensation payment pursuant to the control and profit transfer agreement. This is generally even the case where the capitalised compensation payment as a basis would result in a higher value. In fact, the capitalised value of the company at the time of the resolution in favour of the squeeze-out should be the basis for the calculation of the cash settlement, which should be determined using the discounted cash flow method. If the value thereby determined is lower than the average share price weighted according to sales within a three-month reference period prior to the announcement of the intended squeeze-out, the latter value will apply.

Comment

The basis on which the amount of the settlement is calculated where, pursuant to an existing intercompany agreement, the company concerned is subject to an ongoing profit transfer obligation, is an issue of some contention both in the German jurisprudence and among the higher German courts. With its decision, the OLG Dusseldorf aligns itself with the OLG Munich and also the (marginally) prevailing opinion among legal commentators.

The OLG Frankfurt (ruling of 15 October 2014, case reference: 21 W 64/13) recently took on a different view and argued that the objective was to determine a marginal price that would enable the existing shareholder to withdraw from the company without thereby incurring any disadvantage. Such objective cannot, however, be attained by basing the calculation of said price on corporate earnings to which the shareholder (no longer) has any claim as a result of an ongoing profit transfer obligation. Rather, it is necessary that the valuation take account of the actual payments made to the shareholder.

The OLG Frankfurt has now submitted the decision for review to the German Federal Court of Justice (Bundesgerichtshof – “BGH”). The proceeding has been assigned the case reference II ZB 25/14. However, it is unlikely that a decision will be delivered this year. From a practitioner’s point of view, it would be welcomed if the BGH used this opportunity to establish clear rules governing the calculation of cash settlements in the case of ongoing intercompany agreements.