Squeeze-out

What it means

A squeeze-out is the right of a majority shareholder who has reached a high statutory threshold, usually 95 %, to force minority shareholders to sell their shares for fair consideration. The buyer thus gains the whole company and can simplify its governance.

In Slovakia a squeeze-out concerns mainly joint-stock companies. In listed companies it follows a mandatory or voluntary takeover bid, while for unlisted companies the Commercial Code sets its own conditions for the general meeting's resolution and for determining the price.

The mirror instrument is the sell-out, the right of a minority shareholder to require the majority shareholder who crossed the same threshold to buy their shares. Both mechanisms address a situation where a small remnant of shareholders has no real influence and their shares lose liquidity.

How it works in practice

Before a squeeze-out, the consideration has to be set. Its fairness is usually supported by an expert business valuation or, for listed companies, reviewed by the supervisory authority. The valuation also takes into account the price the majority shareholder paid in the preceding bid.

The transfer of shares is decided by the general meeting on the majority shareholder's proposal, or it is a unilateral act under the Securities Act. The money for the buy-out is often deposited in advance so that minority shareholders are assured of payment.

In a limited liability company there is no general squeeze-out. The majority member must handle the exit of minority shareholders through a buy-out agreement or through mechanisms in the articles or a shareholders' agreement, such as a drag-along right.

What to watch out for

Minority shareholders can ask a court to review the fairness of the consideration. If the court finds the price too low, the majority shareholder will have to pay the difference to all squeezed-out shareholders, not only those who sued, which can make the transaction considerably more expensive.

The squeeze-out threshold is far higher than a blocking minority, so a buyer who reaches, say, 90 % still cannot force out the minority. When planning an acquisition it is worth estimating in advance whether the required stake is realistically attainable and at what price.