1. 7. 2008: Another law for robbing the property of minority shareholders

The law No. 104/2008 of Law Digest about takeover bids is in force since 04/01/2008, revising the law “squeeze out Czech style” in such a way that robbing the property of portfolio investors is even easier than before.

In the case of publicly untradable (unregistered) shares, the Czech National Bank is no longer required to approve expert valuations used by a principal shareholder to determine the amount of compensation (share price). The Czech National Bank had to approve expert valuations since 09/29/2005 till the effective date of the revision. The original law “squeeze out Czech style” was introduced in 07/01/2005 without the supervision of the Czech National Bank, and the consequent introduction of supervision was explained by the need of increased protection of minority shareholders – compare with comments of representatives at the TV station CT 1 (Czech Television 1) on 09/03/2006. After the ruling of the Constitutional Court that “squeeze out Czech style” is all right, Czech representatives changed their mind again: all of a sudden, minority shareholders do not need increased protection any more; on the contrary, they need lower protection, or none at all.

Beginning 04/01/2008, Czech lawmakers repealed, besides the Czech National Bank supervision (when “squeeze out Czech style” is applied to unregistered shares), also the statute of CLC (Commercial Law Code)Section 183i, paragraph 5 that has been included in the law since 09/29/2005 with an explanation that protection of minority shareholders has to be increased. The wording of the statute was: When evaluating the adequacy of compensation, the Czech National Bank will take into account namely the fact that the owner of equity certificates cannot choose if and when he should transfer the certificates to the principal shareholder; if in doubt, the Czech National Bank will lean towards the interests of the equity certificates owners – this is again not in force today as it was not after the introduction of the original law from 07/01/2005 till 09/28/2005.

We should add that in Czech Republic, it is not difficult for the principal shareholders to convert public shares into private ones and therefore, the revision of the law practically affects both public and private shares.

The revision also revoked the three months period that started when the majority shareholder acquired 90% of shares, after which time it was not allowed anymore to exercise the right to “squeeze out Czech style”. Beginning 04/01/2008, the principal shareholder can exercise that right anytime (for instance even after 20 years since acquiring the critical share). Obviously, the principal shareholder will prefer to claim his right when it will be financially advantageous for him, like just before the start of an economic boom in a particular industry, just before the completion of an enterprise revitalization, just before receiving a large order, just before an expected increase of product prices, and so on. Logically, the principal shareholder has always access to such information earlier than others.

However, the most important was the change of the review process caused by a modification of the Civic Court Regulations Section 83, which added another uncertainty into the situation of the minority shareholders (along with the later ruling of the Supreme Court in the case sp. zn. 29 Odo 1019/2006). Based strictly on the wording of the law, the change in the Civic Court Regulations results in preventing almost all affected shareholders from using court proceedings for verification of share price correctness. Once the principal shareholder dictates to minority shareholders the price at which he is going to acquire their shares, only the first shareholder who submits a complaint has a chance to claim his right to a fair price for his shares. For all other shareholders who submit their complaints in time before the deadline, proceedings are suspended. That is because the result of the first lawsuit is supposed to be binding for all plaintiffs (while the remaining plaintiffs do not have an opportunity to present their arguments in the court). As a consequence of the revised conditions of the review process, squeezed out shareholders do not have effective access to the court. According to the Charter of Rights and Freedoms (article 36 and 38) and the Convention for the Protection of Human Rights and Fundamental Freedoms (article 6, section 1), this constitutes a violation of the basic right to a fair process of law.

We can easily imagine a situation when the first shareholder to submit a complaint is in cohorts with the principal shareholder (he will intentionally claim his rights in such a way that the amount of compensation is determined as low as possible, or that he does not win the judgment for supplemental payment at all), or he is a shareholder who does not have sufficient argumentation skills and therefore is not able to win a fair price. It is also easy to imagine what will happen if the first plaintiff withdraws his complaint after many years of litigation (for instance because of an out-of-court settlement offered by the principal shareholder). Then it is the turn for the second shareholder in a row, and multiyear litigations start all over again. This process can be repeated many times without limit, so that the squeezed out shareholders may not live to see a fair judgment.

This situation may have been corrected thanks to a free interpretation (of the law) by the court. The ruling of the CZ Supreme Court in the case sp. zn. 29 Odo 1019/2006 from 04/10/2008 states that every second and next proceeding is an addition to the first one. The logic of it is that if the basis for the claim of every affected person is to be resolved in a single proceeding, all petitioners must be given a chance to fully exercise their rights for a court proceeding. This ruling was admittedly issued in a case of a take-over bid but according to the new commentary to the CLC from the C.H. Beck Publishing, 12th issue, it is useable also for the right of buy-out. It means there is a legal barrier – lis pendens – on one hand and a free interpretation of the Supreme Court on the other hand, which creates another serious uncertainty.

The law “squeeze out Czech style” violated the norms of a legal state even before its review, regardless that the Constitutional Court denies it. However, the revision of this law reveals the intention to further “improve” the position of principal shareholders. It is inconceivable that the lawmakers did not notice the consequences of their decisions when they were publicly talking about these consequences before. In the above-mentioned discussion at the TV station CT 1 from 09/03/2006, representatives of all Parliament parties acknowledge the originally introduced law “squeeze out Czech style” as their mistake, for which they expressed regrets. Party colleagues of Vladimir Dolezal, an ODS representative who sponsored the original bill, voiced especially strong regrets. Economic expert ODS Vlastimil Tlusty, vice chairman Petr Necas and ODS chairman Miroslav Topolanek, current Prime Minister of the government responsible for the latest revision, apologized in the journal Tyden for passing the law. However, the representatives did not do anything to correct the mistakes they confessed to. Instead, they decided to worsen the already scandalous conditions that in the Czech Republic are instrumental in separating minority shareholders from their property, and to add insult to injury, they blocked the affected shareholders from effective access to the court. Thus the “representatives of the people” proved that the TV debate and their further public declarations about the “squeeze out Czech style” were merely a purposeful smokescreen. The revision of this law is the critical piece of a puzzle that shows the unprecedented robbing of hundreds of thousands of predominantly Czech minority shareholders to be an intentional result of the law “squeeze out Czech style” and related legislature, rather than an unexpected consequence of it.