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The squeeze out, or The enforcement of beneficence

A very interesting and controversial provision in the international legal field is without any doubt the squeeze out right. Basically this right – originating from the U.S. legislation and adopted by all the EU states – gives to it`s owner (the majority shareholder in a company) the possibility to force the minority shareholders to sell their shares, so that he can get the full control over the company.

In Romania, the squeeze out is settled through the Law no. 297/2004. This law mentions that „…a person who, as a result of it`s acquisitions or of it`s associates acquisitions, owns more than 33% out of the voting rights in a company, is forced to launch a public offer, addressed to all the transferable securities holders and aiming all their holdings, as soon as possible…”

After the procedure mentioned above is taken to an end, the bidder can demand the shareholders who haven`t answered to his offer to sell their shares, if he owns more than 95% out of the corporate funds or if he has bought (as a result of the public offer mentioned above) more than 90% out of the shares bidded.

By giving these legal provisions a thorough examination, the possibility that a minority shareholder can be forced to sell it`s shares in the profit of the majority shareholder  emerges and this is against any national or international provision involving the private property rights (eg. – the provisions of the Romanian Constitution (art. 44), the provisions of the E.C.H.R. (art. 1 of the additional protocol)).

Therefore, the question that pops out is „how can such a brutal violation of a fundamental human right be possible?” but the situation is more complex and the „violation” is somehow justified, as we will see.

As surprisingly as it may seem, the squeeze out procedure is used exactly to protect the minority shareholders, who (if the procedure is not used) might become trapped in a company who`s evolution they won`t be able to influence and on the other hand, they won`t even be able to sell their shares, as no investor will be interested in buying such a small number of shares.

The intention to protect the minority shareholders interest emerges from the provisions of the EU`s Directive no. 25/2004, which states that „…it is necessary for the EU members to protect the  transferable securities holders, especially of the minority shareholders when the control was taken over their company. To do so, the EU members should impose to the majority shareholder an obligation to launch an offer towards all the transferable securities holders, proposing the acquisition of all their shares at a reasonable price…”

Given the provisions above a new right emerges, but this time the right belongs to the minority shareholders and it is called the sell out right, and it basically opens the possibility of the minority shareholders to force the majority shareholder to buy their shares.

Without analyzing any further, it is obvious that this is a new interference in the fundamental human rights, as no one can be forced to buy.

Without a doubt, the promotion of this rights follows a well determined purpose of the legislator and to identify it an analysis of both the psychologically and the practical dimensions of it`s intention is necessary.

Therefore, psychologically, is obvious that the main reason for one to invest in financial instruments is represented by his/hers prefiguration of the profit that will follow such an act, and the decision to invest is consolidated by the safety provided by the existence of a financial market that assures the connection between the demand and the request.

Obviously, the legislator did not consider the shares as simple goods possessed by their owners, but as a tool necessary to achieve the final purpose – obtaining profit, and this is the exact reason for deciding the implementation of the squeeze out and the sell out rights, forcing the connection between the demand and the request.

Practically, the use of the squeeze out right produces two important effects: –   The transfer of all the shares in the patrimony of the majority shareholder and –   The withdrawal from transaction on the stock exchange of the company.

Both effects have a direct implication in facilitating the control and decision activity in that particular company and on the commercial market as a whole.

Concluding on the subject, the legislator decided to interfere with the commercial market in order to assure the principles that governate this subject, forcing the commerciants to obey a set of preestablished rules and regulations, that may sometimes be correlated to a legal abuse. Following by any means of an activity`s final purpose (commercial activity in this case) is not desirable and it most certainly does not excuse an abusive behavior.

Andrei DINA

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