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Open Issues of the Squeeze out Right in Croatian and EU Court Practices

The right to a transfer of shares of the minority shareholders (i.e. squeeze-out) implies a major shareholder’s right to demand a transfer of the minority shareholders’ shares thereby terminating their membership in the joint-stock company. The minority shareholders may have a complementary right in regards to the major shareholder i.e. a right to demand the major shareholder redemption of their shares (sell-out). This right serves as a quid pro quo to the squeeze-out right. The squeeze-out right is widely used in the domestic corporate practice. For instance, only in 2008, sixteen squeeze-outs had been carried out, while 2009 records eight cases, 2010 thirteen, and 2011 eight cases of squeeze-outs. By June 2012, two squeeze-out cases have been carried out. On the other side, practice has shown that the minority shareholders rarely exercise their sell-out right. This is also due to the fact that it pays more to the minority shareholders for the major shareholder to initiate the squeeze-out procedure (under the Act on the Takeover of Joint Stock Companies) since he or she shall bear the expenses of carrying out the process underway. The scope of the Companies Act does not comprise the sell-out right. The practice has also shown that squeeze-out procedures represent an overture to delisting the shares from the market since the major shareholder becomes the only shareholder in the joint-stock company which, consequently, does not have a sufficient number of shares in free float – also a listing criterion. The concept of squeeze out emphasizes the need to protect the minority shareholders. The national legislators who introduced the squeeze out right provide detailed rules on the key issues: such as the percentage of shares the major shareholder is obliged to hold in order to be authorized to request the transfer of the shares of the minority shareholders (threshold), the body authorized to decide on the squeeze out, provisions on determination of the severance pay, including the provisions when and how it becomes due etc. Since, in most cases, minority shareholders are involved in the squeeze out procedure against their will, legitimacy of the squeeze-out right is often questioned, in front of national constitutional courts, as well as before the European Court of Human Rights who was called to judge upon its accordance with the European Convention on Human Rights. This paper provides an overview of the legal regime of squeeze-out and sell-out rights in Croatian law under the Companies Act and the Act on the Takeover of Joint Stock Companies, as well as in the case law of Commercial Courts in the Republic of Croatia and the Constitutional Court of the Republic of Croatia. With regards to the controversies surrounding this principle both in the Croatian and EU law, the paper presents decisions interesting from the constitutional point of view, with a reference to the Croatian and German constitutional courts case law, as well as that of the European Court of Human Rights. The paper concludes with suggestions on how to improve the regulation of these rights within the Croatian law, having in mind the issues raised in the domestic commercial courts case law.

squeeze out; sell out; Croatian Law; Croatian Companies Act; Directive on Takeover Bids; Act on the Takeover of Joint Stock Companies; commercial courts case law

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