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Print articleMore Stringent Merger Rules to Protect Minority Shareholders
October, 2008 - Associate Kristina Nilsson
In May 2008, the government submitted its proposal 2007/08:155 on more stringent merger rules to parliament. The proposal is made in order to strengthen protection for minority shareholders.
In May 2008, the government submitted its proposal 2007/08:155 on more stringent merger rules to parliament. The proposal is made in order to strengthen protection for minority shareholders.
Normally in a merger, merger consideration is to be paid to the shareholders in the transferring company, i.e. the owners in the company which is being merged into another company. Under the current rules of the companies act, merger consideration may consist of either shares in the acquiring company or cash. Previously, this regulation entailed that majority shareholders in certain cases have been able to circumvent the rules of the companies act’s rules on mandatory redemption and to obtain a larger holding for a value which is lower than what could have been obtained in an external open sale. Under chapter 22 of the companies act, shareholders owning more than 90 percent of the shares in a company, are entitled to acquire the shares of the remaining shareholders. In mandatory acquisition, there are protective rules in order for the shares to be correctly valued and the shareholders to receive market value consideration for the shares acquired. Corresponding protective legislation did not previously exist in the merger rules, which led to the fact that an owner of more than 75 percent of the shares in a company was able to merge this company into a company wholly owned by him/her for a price which he/she decided him/herself. This meant that mandatory acquisition could already be exercised at a 75 percent ownership and without the minority shareholders being guaranteed market value consideration. An example shows how it was done:
A owns 75 percent of AB 1. A also owns 100 percent of AB 2. A decides in AB 2 to adopt a merger plan to take over AB 1, which is easily done since he is the sole shareholder. He decides that the merger consideration will be SEK 100. Before the merger plan can be effected, it must however be approved by AB 1. In this company only a 75 percent majority is required in order to adopt the plan and A can therefore approve the merger consideration and the take over as well, and to the benefit of himself.
In order to avoid majority shareholders circumventing the mandatory redemption rules and in order to save the situation, parliament decided to introduce a provision stipulating that a 90 percent majority should be required for approving a merger plan in the transferring company. This legislation means that the same majority applies as for mandatory acquisition, but not that the value of the shares was secured. However, the members of parliament were not satisfied with the solution and therefore a new proposal was prepared which is intended to replace the current one.
In the proposal at hand, the government has instead proposed that at least 50 percent of the merger consideration be made up of shares. The part is to be calculated on the shares’ market value at the time of adopting the merger. This means that all owners, included the minority shareholders, become shareholders in the acquiring company and that they are not pushed aside in the way previously possible.
In summary, this means that minority protection based on two main elements is introduced. The size of the merger consideration will, to a certain degree, be regulated in that half the merger consideration shall be made up of shares. Since this portion is calculated on the shares’ market value, the remaining portion must also be equal to the market value. In addition, the majority shareholders are forced to bring the minority shareholders to the acquiring company and thereby use the mandatory acquisition rules in order to buy out these shareholders. Through the application of the mandatory redemption rules, a 90 percent ownership in the company is required to obtain ownership of the total holding.
The legislation is expected to come into force on 1 January 2009.
In May 2008, the government submitted its proposal 2007/08:155 on more stringent merger rules to parliament. The proposal is made in order to strengthen protection for minority shareholders.
Normally in a merger, merger consideration is to be paid to the shareholders in the transferring company, i.e. the owners in the company which is being merged into another company. Under the current rules of the companies act, merger consideration may consist of either shares in the acquiring company or cash. Previously, this regulation entailed that majority shareholders in certain cases have been able to circumvent the rules of the companies act’s rules on mandatory redemption and to obtain a larger holding for a value which is lower than what could have been obtained in an external open sale. Under chapter 22 of the companies act, shareholders owning more than 90 percent of the shares in a company, are entitled to acquire the shares of the remaining shareholders. In mandatory acquisition, there are protective rules in order for the shares to be correctly valued and the shareholders to receive market value consideration for the shares acquired. Corresponding protective legislation did not previously exist in the merger rules, which led to the fact that an owner of more than 75 percent of the shares in a company was able to merge this company into a company wholly owned by him/her for a price which he/she decided him/herself. This meant that mandatory acquisition could already be exercised at a 75 percent ownership and without the minority shareholders being guaranteed market value consideration. An example shows how it was done:
A owns 75 percent of AB 1. A also owns 100 percent of AB 2. A decides in AB 2 to adopt a merger plan to take over AB 1, which is easily done since he is the sole shareholder. He decides that the merger consideration will be SEK 100. Before the merger plan can be effected, it must however be approved by AB 1. In this company only a 75 percent majority is required in order to adopt the plan and A can therefore approve the merger consideration and the take over as well, and to the benefit of himself.
In order to avoid majority shareholders circumventing the mandatory redemption rules and in order to save the situation, parliament decided to introduce a provision stipulating that a 90 percent majority should be required for approving a merger plan in the transferring company. This legislation means that the same majority applies as for mandatory acquisition, but not that the value of the shares was secured. However, the members of parliament were not satisfied with the solution and therefore a new proposal was prepared which is intended to replace the current one.
In the proposal at hand, the government has instead proposed that at least 50 percent of the merger consideration be made up of shares. The part is to be calculated on the shares’ market value at the time of adopting the merger. This means that all owners, included the minority shareholders, become shareholders in the acquiring company and that they are not pushed aside in the way previously possible.
In summary, this means that minority protection based on two main elements is introduced. The size of the merger consideration will, to a certain degree, be regulated in that half the merger consideration shall be made up of shares. Since this portion is calculated on the shares’ market value, the remaining portion must also be equal to the market value. In addition, the majority shareholders are forced to bring the minority shareholders to the acquiring company and thereby use the mandatory acquisition rules in order to buy out these shareholders. Through the application of the mandatory redemption rules, a 90 percent ownership in the company is required to obtain ownership of the total holding.
The legislation is expected to come into force on 1 January 2009.
