Within the varied and, for many people, unfamiliar jargon of the stock trading world are the terms “squeeze-out’ and ‘sell-out.’ Both refer to mechanisms for the forced purchase and sale of shares, and are closely linked to the context of a takeover bid.
In 2007, the legal regime for takeover bids (known in Spain by the acronym OPAs) was changed to incorporate the European Community directive into Spanish legislation. The reform recognized two types of shareholder rights in these scenarios: the forced purchase and sale of their participation in the share capital of these companies (squeeze-out and sell-out), in order to make takeovers more transparent.
The exclusion of minority shareholders
When a majority shareholder obliges a minority shareholder to sell his/her shares to him/her, and the minority shareholder does so, we say that a squeeze-out has taken place. This method of excluding minority shareholders from the company can be applied in the case of publicly traded companies in which, following a takeover bid for 100% of the shares, almost the entire social capital of the company is in the hands of the offeror.
The objective of this right to forced sale is that the majority investor can – after having acquired all the capital – take decisions without having to depend on others. That is, the majority shareholder can only effect a squeeze-out in scenarios that meet the following requirements:
- Following the takeover bid, the offering party has a shareholding in the company of at least 90% (Spanish national legislation can set it at 95%)
- That more than three months have not passed since the end of the period for accepting the takeover bid.
- That the offering party pay the minorities a fair price – that is, the price offered in the takeover bid.
With this option, the objective is to avoid that, in a takeover bid that results in a very high degree of control, there are shareholders who refuse to sell their shares or who attempt to obtain a higher price than the one offered in the takeover bid.
Sell-out right: the counterpart
It could be said that this case is symmetrical to the previous one: the holders of the rest of the shares can demand that the majority shareholder buy them in the same conditions contained in the squeeze-out right (at a fair price). In this manner, the rights of the minority shareholders are also protected.
In the event of a forced sale, all the expenses derived from the purchase/sale and the settlement of the transaction are paid by the offeror. In the case of as “sell-out,” the minority shareholders have to cover those costs.