Right to review of Share Exchange Ratio and Cash Payments
Pursuant to Sec 225c of the Austrian Stock Corporation Act (AktG), shareholders may file an application for a review of the share exchange ratio determined or the cash compensation, if any, paid in the course of a merger if either of these were not adequate. However, so far, only (a) shareholder(s) who (at least taken together as a group of shareholders) held a minimum stake of 1 % or a participation in a nominal value of EUR 70,000 in at least one of the companies involved in the merger had the right to file such application.
Following a merger of two Austrian companies resolved upon in a shareholders' meeting during September 2009, a group of shareholders of the absorbing entity filed a motion for a review of the share exchange ratio, arguing that the transferring entity had been valued at a premium of at least 25 to 50 % relative to the absorbing entity. As a consequence, the shareholders of the absorbing entity would be diluted considerably.
At the time of the shareholders' meeting, the claimants together held a stake of 0.00318 %, respectively in a nominal value of EUR 30,442.65 in the absorbing entity.
Current Thresholds are unconstitutional
The court of first instance dismissed the motion because the shareholders did not meet the thresholds set forth in Sec 225c AktG (1 % or EUR 70,000).
Upon appeal by the shareholders, the Vienna Higher Regional Court of Appeals (Oberlandesgericht Wien) submitted the case to the Austrian Constitutional Court. It took the view that Sec 225c (in the relevant part) was unconstitutional, mainly for three reasons, which can be roughly summarized as follows:
- In a (regular) capital increase, shareholders have statutory subscription rights which, if exercised, protect them against dilution. If these subscription rights are excluded, each shareholder (irrespective of the size of their stake) may seek to invalidate the shareholders' resolution arguing that the subscription price was determined at an inadequately low level; in a capital increase in a merger, the statutory subscription rights do not apply. Nonetheless, only shareholders who meet the minimum thresholds of Sec 225c AktG can seek recourse. In the view of the court, there was no objective justification for such differentiation.
- A merger affects proprietary rights of shareholders. While curtailing proprietary rights may be permissible under constitutional principles, this is only the case if restrictions are necessary and proportionate. The full exclusion of review rights under Sec 225c AktG did again not appear to be objectively justifiable.
- Such complete exclusion of a review of proprietary rights by a court might also violate Art 6 ECHR.
The Constitutional Court had already in 2005 lifted a provision of the Austria De-Merger Act which contained the same minimum thresholds for a review of cash compensation payable in a de-merger.
Also in the case at hand, the Constitutional Court sided with the shareholders. It took up the second line of argument presented by the appeals court. It agreed that an inadequately determined share exchange ratio would lead to a dilution of the existing shareholders of the absorbing entity and that such dilution would be a "curtailing of proprietary rights" within the meaning of constitutional law. To be constitutional, such a curtailing of proprietary rights would need to be in the public interest, proportionate and objectively justified. Citing arguments of its 2005 decision, the court repeated that a full exclusion of a right to request a review of the share exchange ratio by an independent court did not meet these constitutional requirements. Neither the fact that the share exchange ratio is reviewed by a merger auditor nor the risk that review proceedings could be initiated abusively would change that.
The Constitutional Court's ruling must be published in the Official Gazette without delay and will be effective immediately upon such publication.