Decisions of the Czech Highest Courts
Decision 1 – The type of review process pursuant the CLC Section 220k
Besides many more ambiguities (see the section “How the Court Review Process does (not) Work”), the law “squeeze out Czech style” does not even give a clear answer to the question in what kind of proceeding the court should review the so-called adequate compensation – that is to the question whether the squeezed out shareholder must submit a complaint for performance (demanding that the court orders the principal shareholder to pay-up to the plaintiff a specific amount corresponding to the total loss), or a complaint for determination or a similar complaint (demanding that the court determines in general the correct amount of compensation per share and thus a corresponding pay-up amount per share).
In the case of review process pursuant to CLC Section 183k, following the so-called genuine “squeeze out Czech style” pursuant to CLC Section183i to 183n, the legal theory leans towards the opinion that it is a complaint for determination. Legal literature deals with the review proceedings issue, for instance in the article of Professor Dedic and Mgr. Pihera (see the journal Ekonom from 05/25/2006) where they say: “For success in a case of a complaint to review the compensation amount, it is sufficient if a minority shareholder proves to the court that the expert valuation contains for instance methodology errors that could result in an incorrect determination of the value of an equity certificate. It is then up to the court to determine the amount of compensation”. According to the authors, it is therefore enough to prove errors in the valuation, and it is not necessary to prove (not even to state) any specific amount of compensation because that will be the result of the review process. Indicative of this interpretation’s correctness is, besides other things, that according to the CLC Section 183k, a minority shareholder may submit a petition even before the transfer of shares to the principal shareholder, before he suffers a loss.
However, Section 220k was introduced into CLC before Section 183k. Paragraph 220k describes a review process that follows a so-called pseudo squeeze out pursuant to CLC Section 220p (in force since 2001). From the point of view of minority shareholders, genuine and pseudo squeeze out are equal legal vehicles, and it would therefore be logical that review proceedings by Section 183k and Section 220k should be equal as well. The explanatory memorandum of the pseudo squeeze out, pursuant to Section 220p, says that the law was fashioned according to the German and Austrian law. In Germany and Austria, it is so-called non-contentious proceeding (meaning that the plaintiff does not have the burden of a proof; rather than that, the court investigates based on its legal mandate), and the amount of a pay-up is generally determined as the amount per share, and the principal shareholder – the initiator of a squeeze out – pays all court expenses. It would be logical that in the Czech Republic, the review process pursuant to CLC Section 220k should proceed in a similar way as in Germany and Austria because in the explanatory memorandum of the Czech law Section 220p, the corresponding laws in these countries are referred to as templates.
Even though the Czech CLC regulation Section 220k is unclear and allows two interpretations as to the type of complaint (for determination or performance), considering that the explanatory memorandum mentions foreign roots of the Section 220p, considering the review process type that according to the CLC Section 183k is for “determination”, which legal literature tends to agree with, and considering the general constitutional principle to read an ambiguous law in favor of the party it is supposed to protect, it would be logical to expect that also the review process pursuant the Section 220k will be for determination or similar type.
Entirely shocking was therefore the ruling of the Czech Republic Supreme Court Senate presided by JUDr. 2
Ivana Stengl(ova) with participating judges JUDr. Petr Gemmel and JUDr. Zdenek Krcmar, from 03/07/2007, sp. zn. 29 Odo 1332/2005
(in Czech), with respect to the type of review process pursuant to CLC Section 220k. In this case, the Supreme Court ruled that shareholders squeezed out against their will according to the CLC Section 220p have to submit a complaint for performance. It means that a shareholder with damages who decides to seek protection of the review process according to the CLC Section 220k, has to exactly calculate his total loss based on the extent of his damages and the number of shares he owns, and has to demand the pay-up before the court determines the general amount of compensation and pay-up per share. The decision about the type of review process as for “performance” has far-reaching consequences for the robbed shareholders.
First of all, it is much more expensive and risky for the plaintiff to exercise his right than if it were possible to ask the court to determine the general amount of compensation and pay-up per share. In the case of a complaint for performance, the plaintiff has to pay a court fee of 4% of total damages, equal to the requested amount of pay-up per share, multiplied by the number of shares the plaintiff owns. If the plaintiff looses, he has to pay high costs of a revision expert valuation (down payment only is usually around 100, 000 CZK) and also looses the mentioned 4% court fee. On top of that, he has to pay high costs of his opponent’s legal representation whose amount is based on total damages (that is, it depends on the value of the litigation that the Supreme Court increased dramatically by its decision) that, however, are not known ahead of time because it depends on an unknown number of judicial instances. That does not take into account costs of plaintiff’s own legal representation he has to pay (these also depend on the value of litigation and number of judicial instances). Prosperous principal shareholders mostly use the most renowned and the most expensive law firms to represent them that are financially out of reach for minority shareholders, and that’s another reason why it is an unfair contest. We can summarize that the more the plaintiff was robbed and the more shares he has (that is the higher his total loss and thus the value of litigation is, the more he is intimidated by the conditions for submitting a complaint, and discouraged from entering into the litigation).
Secondly, it has been said that due to the Supreme Court’s decision, the plaintiff himself has to determine exactly the total amount of his damages before the Court reaches its verdict. A review
expert valuation is of course usually done during review proceedings because courts of lower instances assert that shares valuation is an expert question (how to reconcile the requirement of the Supreme Court that the plaintiff has to determine his damages himself, with the position of lower courts that shares valuation is an expert question, is a mystery). Even if the review expert admits that the initial compensation should have been higher, he usually awards the plaintiff a lower pay-up than the plaintiff is requesting. Even though review valuations are mostly wrong (see the section “Shady Practices of Czech Court Experts”), we know from experience that courts refuse to change that in any way even if the plaintiff explains in detail why the review and valuation are wrong (see the section “How the Court Review Process does (not) Work”). Courts refuse to study plaintiff’s rebukes concerning the initial parameters of the review valuation that are crucial for the results of the valuation (discount rate, financial plan, and so on), with an explanation that these are expert questions (even though foreign courts have to study these matters). The plaintiff is thus railroaded into a situation without a solution: he either adapts his claims to the review expert valuation that he considers to be wrong and that indeed is usually wrong as a rule, and thus waives his right to a fair compensation, or he requests a higher amount of pay-up than shown in the review valuation but then he risks that the court will not consider his objections anyway and in addition, punishes him by requiring him to pay part of costs of the review valuation, part of court fee and part of costs of opponent’s legal representation, with the reasoning that the plaintiff achieved only partial success in his case (he was awarded a lower amount than he claimed). Even if the review valuation during court proceedings demonstrates that the principal shareholder paid too little for the shares, the injured shareholder still must bear part of very high costs of litigation. In an appeal, the applicant must accept all these costs and associated risks again, which is for the injured shareholders - plaintiffs extremely risky and ineffective. For the overwhelming majority of shareholders, the costs of court proceedings will that way far exceed the awarded damages. Therefore, the vast majority of squeezed out and thus robbed shareholders cannot for financial reasons enter into litigation at all.
An example of the cost of review process under the CLC Section 220k, according to the actual court decision of the 1st instance:
|The principal shareholder provided as a settlement:
||1 371 CZK per share
|The plaintiff requested cash pay-up:
||1 078 000 = 308 shares x 3 500 CZK / share
|The amount of pay-up determined by the court, or rather an expert:
||289 736 CZK = 308 shares x 940.70 CZK / share
The plaintiff is required to pay these court costs:
|a) The court costs of the defendant:
||35 207 CZK
|b) The court fee:
||43 120 CZK
|c) The costs of the expert valuation:
||115 495 CZK
||193 822 CZK
From the awarded amount of 289 736 CZK, only 95 914 CZK was left for the plaintiff after deducting costs (if we do not count the cost of his own legal representation, which he must pay from that amount). If the plaintiff had less than 308 shares (which is the case of the overwhelming majority of “coupon shareholders" in stock companies, where the “squeeze out Czech style” was executed), the plaintiff’s costs at just at the first court instance would be far higher than the awarded amount. The plaintiff could avoid the costs of legal proceedings only if he accepted the outcome of the review proceedings even though he considered it wrong.
The right of squeezed out shareholders to a fair compensation is literally sabotaged by the decision of the Czech Republic Supreme Court. To illustrate, the German Parliament’s explanatory memorandum (Print 15/371 in German), page 17, from 01/29/2003) to the law of squeeze out, or rather to the review process integrally linked to this law, says that the opponent (i.e. the principal shareholder) must bear the costs of the review proceedings, because otherwise in most cases, minority shareholders would be effectively prevented from initiating a review procedure due to the risk of high costs. Of course, neither can an ordinary Czech shareholder accept financial risks that the Supreme Court decision imposes on him. In addition, there is absolutely no certainty in the Czech Republic how the review valuation turns out because the review expert is free to do the valuation in any way he pleases (see the section “How the Court Review Process does (not) Work” and the section “Shady Practices of Czech Court Experts”). Therefore, as a consequence of the Supreme Court decision, access to the review process under CLC Section 220k that follows the so-called pseudo squeeze out under CLC Section 220p is effectively blocked for the overwhelming majority of robbed shareholders due to financial reasons; not to mention ambiguities of the law and better defense options for financially much stronger opponents.
The Supreme Court concluded that the review process under the provisions of the CLC Section 220k is the "for performance" type on the basis of at least a very questionable interpretation of the two following provisions. According to the literal wording of the CLC Section 220k, paragraph 1, every shareholder has the right to a pay-up in cash, if the settlement amount (provided compensation) is not adequate. According to the literal wording of the CLC Section 220k, paragraph 5, the judicial decision that grants a shareholder the right to a pay-up in cash is binding for the successor company in terms of the basis of the granted right also with respect to the other shareholders. However, what is in the law referred to as a "settlement" is determined by the principal shareholder and an expert as an indication of the value per share, and is approved by the General Assembly in that form. It is therefore illogical that the review of the settlement and the awarded pay-up has to summarily apply to all shares that the plaintiff owns, as required by the Supreme Court. Besides, if the court resolves in general the essential question of whether the provided amount of the settlement is adequate (by determining the correct amount of the settlement per share), and finds that it is not, the right to a pay-up (performance) should ensue for each shareholder directly from the law (pursuant the Section 220k, paragraph 1, each shareholder is entitled to a pay-up if the settlement amount is not adequate). The logic of the law shows that it is redundant for the minority shareholder to claim his right to performance through a review process because if the amount of the settlement is not adequate, the principal shareholder has an obligation dictated by law to provide a pay-up (performance) on his own. To obtain the rights to a pay-up (performance) for all shares, it should therefore be enough to demand that the review determines the correct amount of the settlement per share and to demand the right to a pay-up per share (in Section 220k, paragraph 5, referred to as the basis of the granted right).
Before granting the right to a pay-up for all shares that the plaintiff owns, the court has to, one way or another, first determine the correct settlement amount per share (it has to resolve in general the question of whether the settlement amount is adequate) and according to that, it has to determine the pay-up amount per share because the pay-up amount for all plaintiff’s shares can not otherwise be established at all. That is why the expert review valuation is also used to determine the settlement amount and the pay-up amount per a share. Why then, regardless of that, the Supreme Court is forcing the squeezed out shareholders to demand a pay-up for all their shares already in the review proceedings (with above mentioned negative consequences for them), is difficult to understand. We must explicitly repeat that the court always has to first determine the amount of the settlement and the pay-up per share (whether it wants to or not), and then the principal shareholder should perform according to the law on his own because the right to a settlement arises from the law. However, the Supreme Court ruling is still forcing squeezed out shareholders to express their claim for a pay-up during review proceedings in the aggregate amount of all their shares. The decision of the Supreme Court subjects the squeezed out shareholders to totally unnecessary and excessive requirements, which reasonably suggests that the purpose of the decision is to discourage active minority shareholders from legal action.
After the verdict of the Supreme Court, Czech parliamentary representatives wasted little time. Instead of correcting the unclear CLC Section 220k that according to the Supreme Court’s opinion allows the above-mentioned hard interpretation, the legislature decided to solidify the destruction of robbed shareholders’ rights explicitly. The new Act No. 125/2008 of Law Digest about transformations of companies and cooperatives, effective from 07/01/2008, already states explicitly that the review process (now contained in Section 47 of the Act on Transformations) must take place under the action of performance, although it is a completely absurd requirement that further weakens the already extremely poor status of the weaker party (squeezed out shareholders).
The Czech Republic Constitutional Court, sp.zn. III. US 1295/07
(in Czech), confirmed as well the validity of a complaint for performance in cases of a review process under CLC Section 220k. The Constitutional Court rejected the claim of some minority shareholders for an exemption from court fees in that it is apparently unfair if they bear the escalating risk of litigation and in fact, the more they are discouraged by court fees, the more the principal shareholder harms them, sp.zn. IV. US 2282/07
2 JUDr. is equivalent to LL.D. in USA