The German Federal Court (Bundesgerichtshof – II ZB 12/21 – link) has rendered a landmark decision in an appraisal dispute (Spruchverfahren) allowing the evaluation of enterprises based on their stock price for German corporate reorganisation measures. This decision can make appraisals of undertakings involved in a post-merger scenario much easier. It may solve many appraisal disputes with minority shareholders in squeeze-out or similar scenarios and should make the overall financial planning for takeovers in Germany more predictable.
A public offer for the acquisition of shares in a German target company must not be less than the three-months average stock price of the target prior to its announcement. But while the stock price as such is the key parameter for the adequacy of the offer price for the purposes of the takeover, German courts have long been reluctant to use the stock price as the key basis for the evaluation, when deciding whether the shares in the buyer or a cash price offered are an adequate compensation for minority shareholders in subsequent corporate reorganisations – such as a squeeze-out of minority shareholders or the integration of the target company by means of control- and profit-transfer agreement.
The German discussion on how to determine an adequate compensation for minority shareholders and the German jurisprudence on appraisal disputes dealing with this topic are endless. For a very long time, the German courts found the stock price to be irrelevant, when the task would be to determine a fair value in appraisal procedures. Following decisions of the German Constitutional Court in 1999 and 2001, this changed. But only with the effect that courts would have to look at the stock price as the floor for the evaluation. Until now, the courts’ practice remained to try and find a fair price, which would provide a so called “full” compensation of the value of the minority shares. Therefore, it was common practice that the buyer and the target obtained expert opinions calculating the relevant enterprise values prior to their reorganisation under income or cash-flow based models approved by the German Institute of Accountants (Institut der Wirtschaftsprüfer – IDW). These evaluations would then be challenged and reviewed by the German courts in appraisal disputes. And German appraisal disputes have always been extremely slow by their nature, which in many cases involve re-evaluations by auditors appointed by the courts and courts looking into all details of the evaluations submitted.
With a view to capital markets having become much more transparent and acknowledging that no perfect evaluation method exists to find the one and only true value of a share, the courts in Frankfurt, which had to decide the matter in previous instances (Landgericht and Oberlandesgericht), allowed a calculation of the compensation of minority shareholders due under control agreement (Beherrschungsvertrag) on the basis of the stock price of the companies involved. And they sanctioned this evaluation with respect to both elements: the exchange-ratio to be applied to a conversion of target and buyer shares, as well as the annual compensation due to outstanding shareholders remaining in the target (now contractually controlled by the buyer).
The New Decision
Now, the German Federal Court has confirmed that, the stock price may not only be applied as a floor, but that it can be used by the enterprises involved and the appraisal courts to determine the fair compensation of minority shareholders in restructuring scenarios. The Federal Court held, that to determine the minority compensation with reference to the stock prices of the undertakings involved, is a reasonable approach and does not in any way rank behind expert opinions on the business values based on their income or discounted cash flows. Further, the Federal Court has rejected all arguments by the plaintiffs, that the fair value must be determined by experts and that the district courts or court of appeal must look at and evaluate expert opinions. Also, the courts must not refrain from applying the stock price just because the takeover offer of the buyer announces the post-merger reorganisation.
Impact on Corporate Reorganisations, in particular Post-Merger
It is obvious that evaluations and evaluation procedures become much easier if the fair value of the shares of outstanding shareholders can be determined with reference to their stock price. Unless for special scenarios, where the public trading of the relevant shares would need to be deemed inefficient (disguised/withheld information situations, no liquid market, price manipulations), the relevant stock prices can be used and therefore the compensation to minority shareholders.
In summary, the decision of the Federal Court creates a solid foundation for the calculation of the fair compensation of minority shareholders in post-merger reorganisations and will make many appraisal disputes more efficient and their outcome predictable. In the ordinary course, parties to a merger will be able to use the stock price for post-merger reorganisations and spare the cost for experts’ evaluations and long-lasting legal procedures. As almost simultaneously the new German law on corporate transformations makes it possible to use a holding’s stock rather than cash where a merger-exchange ratio has been found inadequate (Sections 72a and 72b Umwandlungsgesetz), Germany has removed two significant technical obstacles for post-merger integrations and reorganisations. But open questions remain not least with respect to special capital market scenarios, e.g., how German courts will apply the new doctrine where incidents like the COVID-19 epidemic or the Russian war in the Ukraine have had a significant influence on stock prices.