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Companies Line Up to Make Use of New Squeeze-Out Rule

Germany's new takeover law has only been in place since the start of the year. But companies are already lining up to take advantage of a new rule that allows large majority shareholders to buy up the free-float stock.


The squeeze-out rule is part of the takeover law which Germany's upper house of parliament passed at the end of last year.

Germany's new takeover law has only been in place for a few days and already companies are lining up to take advantage of a new rule that allows majority shareholders with more than 95% of the capital to buy up the remaining free-float stock.

Viva Media AG, which holds a 96% stake in Neuer Markt-listed media group Brainpool AG, announced just before the end of the year that it plans to buy up the outstanding shares.

More companies are forecast to follow suit quickly. "I expect that a number of firms will hold the necessary shareholder meetings as early as the middle of January," said Hans Ulrich Wilsing, partner in law firm Linklaters Oppenhoff & Rädler.

Among one of the first companies likely to make use of the new rule is Systematics AG, in which U.S. information-technology group EDS holds a majority stake.

Another potential beneficiary is Ireland's Waterford-Wedgewood, which plans a full takeover of German porcelain producer Rosenthal.

FAG Kugelfischer, which a few weeks ago became part of family-owned firm INA, is also expected to become subject to the new rule.

The so-called squeeze-out rule is part of the takeover law which Germany's Bundesrat, or upper house of parliament, passed last November.

It allows shareholders who hold 95% or more of the capital to extend a compulsory settlement offer to outstanding shareholders.

Wilsing said he expects mostly international groups holding majority stakes in German companies to take advantage of the new rule.

Several processes to determine the size of compensation offers had already been initiated, he said, and the list of candidates was long.

In a study, Deutsche Bank found 42 companies with a dominant shareholder holding more than 95% of the capital.

They include the Massa, Horten, Praktiker and Kaufhalle subsidiaries of retail giant Metro, as well as big names such as Aachener und Münchener Leben (majority shareholder: Generali), Schmalbach Lubeca (Allianz) and Deutsche ABB (ABB).

The squeeze-out rule offers companies several advantages. It allows them to integrate subsidiaries more easily, and to save the costs involved in holding shareholder meetings and preparing company reports.

Besides, listed companies with a dominant majority shareholder usually attract little attention on the stock market.

But because small shareholders of such groups are often guaranteed an attractive dividend, the new rule has met with strong opposition from organizations lobbying for the rights of retail investors.

Even though small shareholders can ask a court to examine a company's compulsory settlement offer – the terms of which are determined by the parent group – this process can often take up to ten years.

The German Justice Ministry has already drawn up a draft bill aimed at substantially shortening the appeals process.

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