In its ruling of April 21, 2011 (Case no. II ZR 237/09 and II ZR 244/09), the German Federal Court of Justice clarified that minority shareholders are not entitled to a fixed compensation pursuant to Section 304 of the German Stock Corporation Act (AktG) after a so-called squeeze-out. The decision concerns the legal position of excluded minority shareholders following the transfer of their shares to the majority shareholder.
Transfer of Shares and Minority Protection
Squeeze-out under Stock Corporation Law
The transfer of all shares held by minority shareholders to the majority shareholder is regulated by German stock corporation law. A precondition for a squeeze-out is that the majority shareholder holds at least 95 percent of the share capital at the time of the shareholders’ meeting. After the squeeze-out is carried out, minority shareholders lose their status as shareholders and receive a cash settlement.
Entitlement to Compensation Payments
It was previously disputed whether excluded minority shareholders are entitled to ongoing compensation payments or a fixed compensation pursuant to Section 304 AktG after a valid squeeze-out. It is often assumed—by analogy to the rules for control and profit transfer agreements—that there is a continuing entitlement to compensation.
Key Findings of the Decision
No Analogy to Compensation Claims under Section 304 AktG
The Federal Court of Justice clarified that the special protection mechanisms of Section 304 AktG do not apply in the event of a squeeze-out. The compensation payment provided for therein applies exclusively to the case where minority shareholders remain members of the company, for example as a result of an enterprise agreement. In a squeeze-out, however, the shareholder loses his participation completely. Upon payment of the cash settlement, the legal relationship as shareholder ends, so that no further compensation is owed.
No Unintentional Regulatory Gap
The Federal Court of Justice bases its decision, among other reasons, on the fact that the legislature has taken the interests of minority shareholders into account in the context of the squeeze-out and has conclusively regulated the matter. According to the Court, there is therefore no unintentional regulatory gap that would require the corresponding application of Section 304 AktG. In the context of a squeeze-out, minority shareholders receive solely the legally stipulated cash settlement amount.
Significance for Former Shareholders
The rulings emphasize that former shareholders have no claims to ongoing compensation payments after losing their shareholder status—neither from the law itself nor by analogous application of the provisions relating to enterprise agreements. The sole legal basis for claims remains the settlement amount, the adequacy of which can, if necessary, be reviewed in appraisal proceedings.
Conclusion and Further Guidance
The recent decision of the Federal Court of Justice underlines the clear limits of minority protection in the context of a forced transfer of shares to the majority shareholder. It makes particularly clear that a squeeze-out gives rise only to a one-off claim to financial compensation and that no further compensation payments can be asserted.
If there are uncertainties regarding the fundamental issues surrounding the legal consequences of a squeeze-out or the adequacy of the cash settlement, a thorough legal assessment of the respective situation is recommended. Further information and individual legal advice on stock corporation law is provided by MTR Legal at Legal Advice in Stock Corporation Law.
