One of the core shareholder rights in connection with corporate reorganisations is set forth in Section 225(c) of the Stock Corporation Act. This provision allows shareholders to 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 inadequate. However, until recently this shareholder right was limited - such applications could be filed only by a shareholder or shareholders that (at least when taken together as a group of shareholders) held a minimum stake of 1% or a participation in a nominal value of €70,000 in at least one of the companies involved.
In September 2009 the shareholders' meetings of two Austrian companies resolved on a merger. Following these shareholder resolutions, 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 €30,442.65 in the absorbing entity.
The court of first instance dismissed the motion because the shareholders did not meet the thresholds set forth in Section 225(c) of the act (ie, 1% or €70,000).
On appeal, the Vienna Higher Regional Court of Appeals submitted the case to the Constitutional Court. It took the view that Section 225(c) (in the relevant part) was unconstitutional, mainly for the following three reasons:
- 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 its 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, shareholders' review rights are limited by the thresholds of Section 225(c) of the act. In the court's view, there was no objective justification for such differentiation.
- A corporate reorganisation such as a merger affects the proprietary rights of shareholders. While curtailing proprietary rights may be permissible under constitutional principles, this is the case only if restrictions are necessary and proportionate. The full exclusion of review rights under Section 225(c) of the act again did not appear to be objectively justifiable.
- Such a complete exclusion of a review of proprietary rights by a court might also violate Article 6 of the European Convention on Human Rights.
The Constitutional Court had already in 2005 lifted a provision of the De-merger Act, which contained the same minimum thresholds for a review of cash compensation payable in a de-merger.
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, agreeing 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 shareholder's 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 was reviewed by an 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.
For further information on this topic please contact Florian Kusznier at Schönherr Rechtsanwälte GmbH by telephone (+43 1 534 37 0), fax (+43 1 53 43 76100) or email ([email protected]).