The Eastern High Court finds compulsory acquisition unlawful

Date 8 dec. 2010

 

On 7 December 2010, the Eastern High Court handed down its long-awaited ruling on the compulsory redemption of shares owned by minority shareholders in the Danish bank bankTrelleborg.


The ruling says that the conditions for compulsory redemption of shares owned by minority shareholders after the special rules of the Financial Business Act were not met. Therefore, the compulsory redemption carried out was unlawful.


Given that minority shareholders in the Eastern High Court's opinion would not have received a higher payment for their shares if the compulsory redemption had not been completed, the Eastern High Court did not award the minority shareholders additional consideration for their shares.


Besides determining Denmark's first class action lawsuit, the case is interesting in that it contributes to a clarification of how the rules on compulsory redemption should be interpreted.

 

The case

On 21 January 2008, as part of Sydbank's takeover of bankTrelleborg, it was decided to compulsory redeem bankTrelleborg's minority shareholders. The price per share was initially DKK 59.30 and was later increased to rate DKK 93.27 per share.


Compulsory redemption is a material interference in minority shareholders' rights and therefore requires support from a high proportion of a company's shareholders before it can take place. Thus, a shareholder must as a general rule own more than 90 % of the shares of a company – and the corresponding number of votes – before compulsory acquisition can take place.


However, if a bank does not meet the capital requirement and the FSA has set a deadline before which the capital requirement must be met, the Financial Business Act contains an eased access to compulsory acquisition. In such cases, the majority shareholder needs only to own 70% of the bank's shares before redemption can take place.


BankTrelleborg failed to meet the capital requirement and the FSA had set a deadline for compliance. "Fonden bankTrelleborg", a Danish foundation and the majority shareholder in bankTrelleborg, asked for compulsory acquisition under the eased rules in connection with a subsequent transfer of all shares to Sydbank.


The foundation owned only 67.33% of shares in bankTrelleborg, but if ignoring bankTrelleborg's own shares, the foundation owned 73.36%. The compulsory acquisition was therefore completed.


The question was whether bankTrelleborg's own shares could be ignored when determining the percentage of shares owned by the foundation with the result that the eased rules could apply. Otherwise, the redemption would be unlawful, since the conditions for using the eased rules were not present.

 

The parties

The case was filed by the Association for Minority Shareholders in bankTrelleborg on behalf of 4,770 minority shareholders. The defendants were the foundation, which had requested redemption, Sydbank, which after the compulsory redemption bought all shares in bankTrelleborg and the FSA, which had approved the redemption scheme. Sydbank was subsequently merged with bankTrelleborg.


Minority shareholders contended that the compulsory redemption was unlawful and that the price per share should be increased to DKK 250 per share.


Alternatively, the minority shareholders claimed that if redemption was found lawful, the price per share should be increased to DKK 219.59, equivalent to the price on the last day before the compulsory redemption.

 

The Eastern High Court's ruling

The High Court noted that there are no support in case law, preparatory works or administrative practices that exclude a company's own shares in determining whether a shareholder owns enough shares to enable compulsory redemption.


As a result, the High Court chose to focus on the wording of the provision and based hereon concluded that also shares owned by bankTrelleborg itself should be included in determining whether the foundation owned at least 70% of the shares in bankTrelleborg.


Thus, the foundation owned only 67.33% of the shares in bankTrelleborg and redemption could not have happened under the eased rules in the Financial Business Act. The compulsory redemption was therefore unlawful.


However, since the minority shareholders had not proven a loss, they were not awarded any additional payment for their shares.

 

Significance of the ruling

As the court did not award the minority shareholders any compensation as a result of the wrongful redemption, the ruling will hardly have material consequences in the case as such. Thus, the minority shareholders have not argued that corporate decisions, records etc. should be repealed.


However, the ruling is important when assessing how to proceed with a company's own shares in the event of compulsory redemption under the eased rules in the Financial Business Act.



If you have questions or need further information, please contact Dan Moalem, Partner, (dmo@mwblaw.dk) or senior associate Henning Hedegaard Thomsen (hht@mwblaw.dk).


The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis for decisions or considerations