2008/03/27 - Pl.ÚS 56/05: Squeeze-out

27 March 2008

HEADNOTES

 

1.

The Constitutional Court adjudicates also further circumstances of

given matter if formal annulment of the legal regulation would mean the

danger that the same regulation would be passed again, but simply with

the difference that all the requirements of the legislative process

would be observed. In such a case, the formal and procedural aspects of

the review cede to the requirements of the principles of a material

law-based state, legal certainty, and effective protection of

constitutionality.

 

2.

The reference point for review of the constitutionality of statues

under Art. 87 par. 1 let. a) and Art. 88 par. 2 of the Constitution of

the CR is the constitutional order. The application of community law as

directly applicable law is in the jurisdiction of the ordinary courts,

which, in cases of doubt about the application of the law, have the

opportunity, or obligation, to turn to the European Court of Justice

with a preliminary issue under Art. 234 of the Treaty on European

Community (TEC).

 

3.

An obligation arises from Art. 1 par. 2 of the Constitution of the CR

for the Constitutional Court, as a state body, of the Czech Republic, to

make an interpretation of the constitutional order consistent with

European law in those areas where community law and the legal order of

the Czech Republic meet (the undertaking of loyalty under Art. 10 of the

TEC). Of course, it has to be a matter of interpretation of the

constitutional order in relation to domestic law.

 

4.

If an international treaty contains a different legal regulation, it is

necessary to apply the principle that the treaty takes precedence and

refer to the rules enshrined in Art. 10 and Art. 95 par. 1 of the

Constitution of the CR. The observance of this principle is adjudicated

by the Constitutional Court in the framework of the proceeding on

constitutional complaint.

 

5.

Lack of clarity in a statutory regulation must be eliminated by the

case law of the ordinary courts, and eliminating lack of unity in the

decision-making of the ordinary courts falls under the jurisdiction of

the Supreme Court. The Constitutional Court has already stated several

times that it can intervene in this area only if there is simultaneously

a violation of the constitutional order, and the lack of precision,

uncertainty, and lack of foreseeability of a legal regulation extremely

violates the fundamental requirements of a statute in the context of a

law-based state.

 

6.

The use of a forced buy-out does not rule out interference in the

constitutionally guaranteed rights of shareholders, but that possibility

alone does not make the regulation unconstitutional. That could happen

only if the state, within its protective function, did not provide

minority shareholders means for legal protection. The fact that

constitutionally guaranteed rights may be violated on the basis of the

legal regulation of a particular institution (e.g. detention, expulsion,

expropriation, expulsion from a society) does not make the regulation

unconstitutional. That would happen only if the constitutional

“guarantees” were shown to be fictitious.

 

7.

A corporation has a different character than a trade union,

association, political party, or religious society. The purpose of a

corporation is the concentration of capital, investment, conduct of

business, and earning profits. The position of shareholders cannot be

compared with membership in other types of associations or societies.

Therefore, both the rights of shareholders and their obligation differs.

 

8.

From the point of view of applying the prohibition on discrimination,

it is important that the Commercial Code, in defining the principal

shareholder and minority shareholders, does not provide any exceptions.

The possibility of a forced buy-out conducted by the principal

shareholder can not be considered an unjustified advantage, because it

is based on rational and objective grounds (see above). Likewise, we can

not determine that comparable groups of minority shareholders are in an

unequal position in terms of the same possibility to apply their shares

in the same scope, as can be done under the same conditions (defined by

the statute) by a comparable group of other minority shareholders.

 

9.

Decision making at a shareholder meeting, based on owning shares of a

particular nominal value, is fully in accordance with the nature of this

kind of entrepreneurial association under Art. 11 par. 1 and 3, Art. 20

par. 1 and Art. 26 par. 1 and 2 of the Charter. Insofar as the

Commercial Code provides different levels of minority protection in a

corporation, based on the importance of a decision being made

(unanimity, nine tenths, three fourths, two thirds, a simple majority –

§183i par. 1, §186 of the Com. Code) and ties this to the relationship

between the shareholders (§66a of the Com. Code), there can be no

objections to this on constitutional grounds.

 

10.

For the Constitutional Court, in the case of a forced buy-out, it is

essential that this economically based procedure (rationality and

suitability of interference) be legally regulated as is required in a

law-based stated (legality of interference). Therefore, it is not

necessary to consider the question of the public interest in the same

procedure as for expropriation.

 

11.

The right to a forced buy-out does not involve the usual

decision-making at a shareholder meeting. There is a qualified majority

so large that possibly objections about abuse of position are already

practically suppressed. In terms of the principle of proportionality, in

view of such a ratio, it is difficult to make any objections, if other

safeguards for protecting property rights are observed in the regulation

of the forced-buy out procedure (adequate consideration, legal

protection). Permitting a forced buy-out is a matter for business

decision of a majority shareholder, where it is limited by the deadline

and conditions which, although they will not protect the membership of

minority shareholders (the aspect of the right to association, freedom

to do business, and opportunity to decide) in the corporation, will

protect their existing business share, as expressed in the form of

shares, which is a condition for such a regulation to be constitutional

(Art. 4 par. 4 of the Charter). The role of the state and its bodies

(the Czech National Bank, a court) is not to review the outlook for

whether the business decision is correct, but to evaluate whether the

statutory conditions for taking such a step were met, and, if

appropriate, provide legal protection to the bought-out shareholders. In

terms of proportionality, in this case priority is given to the

principal shareholder’s property rights and right to do business (Art.

11 par. 1 and Art. 26 par. 1 and 2 of the Charter).

 

12.

If the principal shareholder uses the opportunity for a forced share

buy-out that the law provides for the abovementioned reasons, it behaves

permissibly and does not abuse the right. The rules prohibiting abuse

of position by a shareholder under §56a of the Com. Code, with the

ability to proceed under §131 of the Com. Code (invalidity of

shareholder meeting resolution), also naturally apply to a forced share

buy-out.

 

13.

In this regard the Constitutional Court concluded that non-amendment of

a legal regulation for the entire existence of a legal relationship is

unquestionably not part of the principle of legal certainty. The law is a

dynamic system which responds to developments and trends in society.

The present case of a forced share buy-out involves a generally accepted

false retroactivity. The regulation of a forced buy-out does not in any

way affect the acquisition of securities and the entitlements connected

with them.

 

14.

The question of proportionality of price for the bought-out shares can

be addressed only as part of a procedure under §183i par. 5 of the Com.

Code (review by the Czech National Bank) and §183k of the Com. Code

(judicial protection of the owners of securities). In an abstract review

of the constitutionality of a statute we can only evaluate in terms of

proportionality whether interference is possible, necessary, and

desirable in terms of another fundamental right, whether protection

exists at all, and whether it is adequately guaranteed.

 

15.

A share, as an expression of a proportion of a certain property value,

is the subject of property rights. In this case, in view of what was

stated above about the nature of a corporation, the nature of shares,

and the nature of the right to a forced buy-out, we must start with Art.

4 par. 4 of the Charter and take into account the essence and

significance of share ownership. The proportionality of price means a

requirement to take into account all important circumstances in

connection with the forced buy-out. That means that, from the point of

view of the law, it may not be set subjectively.

 

16.

In this regard, adequate consideration, in view of the grounds for a

forced buy-out, preserves the value of shares as a special kind of

uncertain investment. Whether a price is adequate is a matter for expert

and impartial evaluation. The selection of the expert by the principal

shareholder, if it is compensated for by other measures on the part of

the state, does not cause unconstitutionality of legal regulation of

setting price, as well as the fact that the costs of an expert appraisal

are paid by the principal shareholder. The same objection could be

raised if the costs were paid by a minority shareholder. Bad experiences

with some experts can not lead the Constitutional Court to declare

unconstitutional a legal regulation that may be interpreted and applied

unconstitutionally.

 

17.

From that point of view the term “different amount of consideration” in

§183k par. 1 of the Commercial Code must be understood only as a

threshold below which one may not go in judicial review. This also

applies to the actions of the Czech National Bank under §183i par. 5 of

the Commercial Code. In terms of Art. 11 par. 1 of the Charter any other

interpretation would be disadvantaging the minority shareholder.

18.

Even though, in the case of the Czech National Bank, in view of its

position, the required distance from the shareholders is presumed, it is

nevertheless not a body that meets the requirements of Art. 4 of the

Constitution of the CR and Art. 36 of the Charter.

 

The

lack of a specified interest rate for late payment of consideration

under §183m of the Commercial Code can not be considered as

unconstitutional with regard to the existence of general legal

regulation. In contrast, it would be necessary if the law wanted to rule

out application of the legal regulation of commercially binding

relationships for relationships arising between shareholders [e.g., §369

of the Com. Code, or §340 par. 2 of the Com. Code, together with §261

par. 3 let. a) of the Commercial Code].

 

 

 

 

CZECH REPUBLIC

CONSTITUTIONAL COURT

JUDGMENT


IN THE NAME OF THE CZECH REPUBLIC

 

 

The

Plenum of the Constitutional Court, consisting of František Duchoň,

Vlasta Formánková, Vojen Güttler, Pavel Holländer, Ivana Janů, Vladimír

Kůrka, Dagmar Lastovecká, Jiří Mucha, Jan Musil, Jiří Nykodým, Pavel

Rychetský, Miloslav Výborný and Michaela Židlická, in the matter of a

petition from a group of senators from the Senate of the Parliament of

the Czech Republic, represented by Senator Soňa Paukertová, legally

represented by JUDr. Petr Zima, attorney in Prague 2, Slezská 13,

seeking the annulment of §183i to §183n of Act no. 513/1991 Coll., the

Commercial Code, with the participation of the Chamber of Deputies of

the Parliament of the Czech Republic and the Senate of the Parliament of

the Czech Republic, as parties to the proceedings, in a hearing,

decided as follows:

 

The petition is denied.

 

 

REASONING

 

I.

Recapitulation of the Petition and the Petitioner’s Arguments

 

1.

In the petition, which was delivered to the Constitutional Court on 16

November 2005, a group of senators (the “petitioner”) sought the

annulment of §183i to §183n of Act no. 513/1991 Coll., the Commercial

Code, as amended (the “Com. Code”), which are included under the general

heading “The Right to Buy Out Securities,” (the “buy-out right” or

“Squeeze-Out”). Pursuant to §35 par. 2 of Act no. 182/1993 Coll., on the

Constitutional Court, as amended by later regulations (the “Act on the

Constitutional Court”), the Constitutional Court denied the petition by

its resolution of 8 December 2005, file no. Pl. ÚS 53/05, when it

determined that it had already received, in the same matter, under file

no. Pl. ÚS 43/05, a petition from the Municipal Court in Prague seeking

the annulment of §183i to §183n of the Com. Code and §200da of the Civil

Procedure Code (the “CPC”). In accordance with §35 par. 2 of the Act on

the Constitutional Court, the petitioner became a secondary party to

the proceedings in the matter file no. Pl. ÚS 43/05.

 

2.

The petitioner filed its petition again, referring to new elements

that, compared to the petition file no. Pl. ÚS 43/05, were introduced

into the provisions on the right to buy out securities by the amendment

of the Commercial Code in Act no. 377/2005 Coll., on Financial

Conglomerates. It referred to the arguments that it presented in the

previous filing regarding the contested provisions of the Commercial

Code.

 

3.

The Act on the Constitutional Court does not expressly address the

status of a petitioner whose petition was denied under §35 par. 2 of

that Act, and who therefore became a secondary party in a previously

opened proceeding, in which proceeding the petition was denied without

being reviewed on the merits. In particular, in a case where the

petitioner in the previously opened proceeding is a court, under §64

par. 3 of the Act on the Constitutional Court (specific review of

constitutionality), it is not ruled out that the Constitutional Court

may reach a conclusion that the petition does not meet the requirements

of Art. 95 par. 2 of the Constitution of the CR, and deny the previous

petition due to the petitioner obviously being unauthorized, or a

situation may arise where the proceeding before the ordinary court,

where the initiative arose to file a petition under Art. 95 par. 2 of

the Constitution of the CR, was stopped. This would place the later

petitioner in a situation where he would be deprived of the possibility

to exercise his claims and defend his fundamental rights and freedoms.

The Constitutional Court addressed this situation in its decision-making

practice with a legal construction according to which, in such a case,

it considers the impediment of lis pendens to have fallen away (cf.

judgment file no. Pl. ÚS 5/05, no. 3/2006 Coll.). In the adjudicated

matter, the Constitutional Court, in its resolution of 5 September 2006,

file no. Pl. ÚS 43/05 and ref. no. Pl. ÚS 56/05-41, removed from the

proceeding under file no. Pl. ÚS 43/05, for separate review, the

petition filed by the petitioner as a secondary party in the proceeding

file no. Pl. ÚS 43/05, and attached this excised petition of the

secondary party (original petition file no. Pl. ÚS 53/05), for joint

proceedings, to the petition conducted heretofore as file no. Pl. ÚS

56/05. A new judge rapporteur was appointed at the same time.

 

4.

We note that during the course of the proceeding under file no. Pl. ÚS

43/05, on 10 March 2006, 10 April 2006, and 4 September 2006 the Supreme

Court received applications from Jaromír Horáček, Ing. Jiří Nejezchleba

and Ing. Jan Čížek to be granted secondary party status under §63 or

§76 par. 3 of the Act on the Constitutional Court, in connection with

the application of §183i to §183n of the Com. Code, relating to the

transfer of securities from them to a shareholder who met the conditions

set forth in §183i par. 1 (the “principal shareholder”). On 22 June

2006 the Constitutional Court received a letter from the Municipal State

Prosecutor’s Office in Prague stating that, in the legal matter of the

petitioner Zkušebnictví, a. p., on an application to register the

transfer of shares into the commercial register under §183i of the Com.

Code, it was entering the proceeding under §35 par. 1 let. i) CPC. These

applications were handled within that proceeding, with reference to the

fact that, in proceedings on the annulment of statutes and other legal

regulations, the Act on the Constitutional Court does not recognize

secondary participation, with the exception of cases arising as a result

of procedures under §35 par. 2 of that Act. A party to proceedings

before the Constitutional Court can be only a party designated as such

by the Act on the Constitutional Court (§28 par. 1 to 4).

 

5.

The petitioner presented its arguments in the petition file no. Pl. ÚS

53/05, which, on the basis of the abovementioned resolutions (point 3),

was attached for joint review to petition file no. Pl. ÚS 56/05, and

subsequently maintained under file no. Pl. ÚS 56/05. Of course, in the

course of the proceedings, the petition (whether under file no. Pl. ÚS

43/05 or Pl. ÚS 56/05) was further supplemented by other filings,

together with additional evidence consisting of articles from expert

journals, examples of foreign regulations of “squeeze-outs,” statements

from the Securities Commission, etc. The arguments were added to in this

manner by filings of 5 January 2006, 18 April 2006 and 27 September

2006. Finally the petitioner summarized and completed its petitions and

arguments in a filing on 28 February 2007. This last filing was

therefore taken as a starting point for summarizing and organizing its

arguments, though the previous filings were also taken into account. The

objections against the regulation of a forced buy-out can be organized

as follows:

a) in the first group

of defects the petitioner included conflict with the legal regulation

of the buy-out of securities as contained in the European Parliament and

EC Directive 2004/25/EC, Official Journal of the EU. Special edition

2004. Ch. 17, vol. 002 (the “Thirteenth Directive”);

b)

the second group, according to the petitioner, are defects that

represent conflict with the principles of the Convention for the

Protection of Human Rights and Fundamental Freedoms (the “European

Convention”);

c) the third group of defects are conflicts with the provisions of international treaties on the protection of investments;

d) the fourth group of defects the petitioner described as defects of a procedural nature;

e) the last group includes defects which, according to the petitioner, do not fall into groups one through four.

 

6. As regards objections that the buy-out regulation is in conflict with community law, the petitioner alleges, primarily:

a)

incorrect adoption of Art. 15 of the Thirteenth Directive, because

under the directive it is necessary to meet two cumulative conditions –

reaching at least 90% ownership of shares, and simultaneously at least

90% of the voting rights, not only one of these conditions;

b)

the fact that the rights to a minority sell-out is not provided, i.e.

the right of a minority to shareholder to require the majority

shareholder to buy all his shares. In one of its previous filings the

petitioner pointed out that the buy-out right, (the “squeeze-out”) and

the minority shareholder’s right (the “sell-out”) are mutually

complementary measures. Non-implementation of the second institution in

the Czech Republic was not justified in any way, and it mars the outcome

prescribed by the directive. In this manner the other side, i.e.

shareholders who own 10% and less of securities, under §183i par. 1 of

the Com. Code;

c) At the time the

Thirteenth Directive was passed, the Czech Republic did not have a

regulation for the right to buy out listed shares. Therefore it could

not pass any regulation of the right to buy out such shares that did not

follow a takeover bid. The basic rule is that a buy-out offer can only

follow a takeover bid (§183a of the Com. Code). An exception is made

only for states that already had such a regulation when the Thirteenth

Directive was adopted;

d) related

to this is the non-implementation of a rule assuming that the price is

correct after a voluntary takeover bid. A takeover bid, which is to

precede a buy-out, is an important test of the adequacy of the share

price. If no one accepted the takeover bid, the consideration for shares

can not be adequate (proportionate) to the share value;

e)

related to this is the absence of the condition in Art. 15 par. 5 of

the Thirteenth Directive – a guarantee of a fair price. However, that

price is set by the principal shareholder and supported by an expert

appraisal made by an expert selected and paid by the principal

shareholder. The appraisal is always biased. The law does not provide

any useable criteria for appraisal besides the terms “adequate” and

“fair,” so the amount depends on the expert’s discretion. Here the

petitioner pointed to appraisals that differ by several hundred percent.

 

7.

According to the petitioner, the regulation of the buy-out right is

also inconsistent with the European Convention. Among these defects it

included:

a) conflict with the

principle of legality, which requires a legal regulation to be precise,

definite, and predictable (with reference to judgment file no. Pl. ÚS

44/03 of 5 April 2005, no. 249/2005 Coll.), which §183i of the Com. Code

does not meet. This provision contains not just one element of

uncertainty, but a number of them – an uncertainly specified deadline

for calling a shareholder meeting, an unclear definition of the kind of

proceeding and the required statement of claim (for determination, for

performance), unclear regulation of the termination of the right, or

expiration of the entitlement to review the consideration in §183k par. 2

and 3 of the Com. Code (with reference to the statement from I.

Štenglová in the supplement to the 10th ed. of the Commentary to the

Commercial Code from the publishing house C. H. Beck, p. 88), an unclear

circle of parties to the proceedings under §183k of the Com. Code, an

unclear definition of the party obligated to provide consideration,

unclear rules for the date of record for evaluation of the amount of

consideration under §61 par. 2 of the Com. Code compared to the practice

of the principal shareholders and the Czech National Bank, lack of

clarity regarding the opportunity for other shareholders to proceed

under §183k par. 5 of the Com. Code, and unclear rules for returning to

the original state in the event that a court finds the shareholder

meeting resolution to be invalid. According to the petitioner, the basic

attributes of consideration for shares are unclear, because the terms

“adequate” and “fair consideration” are subjective. All these elements

of lack of clarity work to the benefit of the principal shareholder, as

it is clearly described how it is to acquire shares. The procedure for

protecting the rights of minority shareholders is described unclearly or

is completely lacking. Yet, courts can not be expected to protected

them, because of the exaggerated formalism of the general justice system

(Holländer, P.: Ústavněprávní argumentace [Constitutional Law

Arguments]. Praha. Linde 2003, p. 77);

b)

conflict with the requirement of the public interest when regulating

the buy-out right. The public interest exists in the case of a buy-out

in a company with listed shares, conducted after a takeover bid, because

it arises from the fundamental documents of the European Communities.

However, the Czech legislature did not provide any justification for the

public interest in cases that it regulated beyond the framework of the

Thirteenth Directive (buy-out of unlisted shares and buy-out of listed

shares conducted without a takeover bid). No background report exists to

the petition from Deputy Doležal; he simply referred to the Thirteenth

Directive. The grounds given in the literature, to relieve a corporation

of the pointless expense of shareholder meetings is deceptive and

irrelevant. According to the press, even companies that conducted a

share buy-out, are considering public offerings of shares again;

c)

the lack of a possibility for preliminary review (before the transfer

of share ownership) that a corporation’s procedure in a buy-out has been

legal. In legal systems where registration in the commercial register

is a prerequisite for the transfer of rights (such as Germany and

Austria), there is an opportunity to examine whether a corporation’s

procedure has been correct – e.g., whether the principal shareholder

really has a sufficient number of shares, whether that is adequately

documented, whether a shareholder meeting was duly called, whether

conditions for the buy-out right were met, whether the right has not

been abused, etc. In this regard, according to the petitioner, the Czech

Republic is an exception (see §131 of the Com. Code).

 

8.

According to the petitioner, a forced buy-out of shares is in conflict

with international treaties on protection of investments, because

corporations also have foreign shareholders. Here, the petitioner

claims:

a) a measure to remove

someone’s property rights must be subject to judicial review, both in

terms of the relationship to the investment, and in terms of correct

appraisal. However, in commercial register registration proceedings, the

court can not review anything (§200da CPC), and in proceedings to

declare a shareholder meeting invalid §131 of the Com. Code is an

impediment to effective review;

b)

the lack of clarity that, in practice, leads to widespread recording of

the amount of consideration as of a different date than that on which

the transfer of ownership was announced. According to these treaties,

compensation is supposed to be equal to the market value of the

transferred investment immediately before the decision on the transfer

was announced. However, in all known buy-out cases, the value of shares

was set as of a “date of record” several months before the decision was

announced. This is also in conflict with §61 par. 2 of the Com. Code;

c) the non-existence of interest on the consideration, from the transfer date to the payment date.

 

9.

The petitioner sees procedural defects primarily in the failure to

observe the principle of equal weapons, protection of the weaker party,

and access to the courts. It identified the following specific

inadequacies:

a) lack of a

guarantee that a measure leading to a squeeze-out, will really be

reviewed by a court in an adversarial and public trial. In registration

proceedings, nothing is reviewed and the squeezed-out shareholder is not

a party to the proceeding. Moreover, with the help of §131 of the Com.

Code a reason is always sought to stop the proceeding or deny the

complaint. Even if a minority shareholder’s complaint were justified,

original state of affairs may not be restored, as there is a certain

fait accompli, created by the registration in the commercial register.

The court that will rule in the matter will have that existing situation

as its starting point, and, in view of the principle of legal certainty

and protection of the rights of third parties, will be inclined to deny

a petition to review the shareholder meeting resolution. Therefore, the

review should take place before the transfer of ownership, as in a

number of other states, even though it is tied to action by minority

shareholders (the Netherlands, Great Britain, Sweden), or depends on the

court’s discretion (Germany, Austria). In the Czech Republic such

review is ruled out under §131 par. 3 of the Com. Code. Also, the

principle of protecting the weaker side is not observed in the review of

the amount of consideration. Therefore, the proceeding is burdened with

defects that violate the principle of proportionality;

b)

failure to respect the principle of equal weapons in reviewing the

amount of consideration. Under §183k of the Com. Code, a minority

shareholder gets to have his say only when he already has against him

obstacles such as the expert appraisal, the position statement from the

Czech National bank, and registration in the commercial register,

without having had an opportunity to be involved or be a party to the

proceeding;

c) a considerable

information deficit among minority shareholders concerning the state of

the company’s assets and its likely future business results, on which

the appraisal is usually based. This results in unequal weapons in the

review proceedings, because as a rule most appraisals are based on

documentation from the company’s board of directors;

d)

the petitioner sees as a fundamental defect the principle that in the

review proceeding the court is guided only by the plaintiff’s complaint.

The plaintiff has little information to enable him to calculate the

correct amount of consideration in a short period of time. Together with

allocation of the costs of the proceeding to the party that loses the

dispute, this is another obstacle to the exercise of his rights. In

Germany, for example, as part of the Spruchverfahren, a shareholder is

not forced to make such a calculation of the amount of the claim;

e) thus, the burden of proof does not shift to the principal shareholder, unlike in foreign regulations (Germany, Austria);

f)

the costs of the proceedings are imposed on the minority shareholder,

which is another obstacle for exercising his rights in court. The

regulation of proceedings costs thus has a discouraging effect. In the

original petition, the petitioner further developed this opinion,

stating that, according to some commentators on the Commercial Code, the

squeezed-out shareholder would be forced to bear the costs of the

review proceeding, and pay a court fee that becomes higher, the more the

principal shareholder, in cooperation with the expert, “cheats” him

when determining the amount of consideration. If the

disproportionateness of consideration is also removed as grounds for a

complaint to declare a shareholder meeting (§183k par. 5 of the Com.

Code), then the complaint to declare a shareholder meeting invalid must

be replaced by a proceeding that is conducted in an analogous regime, or

a proceeding that does not further worsen the position of the

squeezed-out shareholder. Otherwise, it can not be said that the review

proceeding is one that, in terms of adequate legal protection, replaces

the proceeding to declare a shareholder meeting resolution invalid. Here

the petitioner pointed to the example of the German regulation, in

which the principal shareholder bears the costs of the review proceeding

(Spruchverfahren);

g) the

non-existence of any effective protection for other shareholders, as the

regulation does not provide the institution of a joint representative,

or their right to be informed about the result of the proceeding,

h)

the need to file a complaint abroad if the principal shareholder is a

foreign person. That is another burden, and for most minority

shareholders, an insurmountable obstacle.

 

10. Among the remaining defects in the regulation of the buy-out right the petitioner presented:

a)

the fact that this is a private law relationship, where the principle

of formal equality should be respected. Nevertheless, the law gives the

principal shareholder the right to unilaterally adjust the relationship –

the amount of consideration is decided by an expert hired and paid by

the principal shareholder, and the minority shareholder gets to have his

say in adversarial proceedings only after all the important points have

been decided by the shareholder meeting and reviewed by a notary,

expert, and the Czech National Bank. The dialogue on the correct amount

of consideration thus takes place between the principal shareholder and

an expert hired by it, and the public authorities. Only after that does

the minority shareholder get to have his say;

b)

§183i of the Com. Code, which does not permit effective exercise of the

right to supplemental consideration. The present legal regulation does

not even give squeezed-out shareholders an opportunity to learn about

the conduct of the dispute. In the original petition, the petitioner

stated in this regard that civil court proceedings are public, but the

decisions of courts in general matters are usually not made public

(decisions in matters of unfair competition are an exception). In order

for the right arising from §183k par. 3 of the Com. Code to be

exercised, the other entitled parties first have to find out about the

different amount of consideration. Because the law does not provide any

mechanism for making the decision public, for most of the entitled

parties this is merely a formal right, which can not be exercised

effectively;

c) not respecting

the rights of secured creditors, to whom the Commercial Code does not

give the right to proceed under §183k par. 3 of the Com. Code

 

11.

Thus, the legal framework does not motivate the principal shareholder

to behave honestly, because it is not in any way penalized for conduct

in conflict with good morals. Its only risk is that it might have to pay

additional amounts to some shareholders who have sufficient funds to

bring a lawsuit for review of consideration before a formalistically

thinking judge. The requirements of legality and proportionality are not

respected in the transfer of shares, in the proceedings to review the

legality of measures leading to the transfer, or in setting and

reviewing the amount of consideration.

 

12.

Finally, the petitioner added a new argument, claiming that Deputy

Doležal’s proposal, which introduced the buy-out right into our legal

framework, was described as an amending proposal, although, in light of

Constitutional Court judgment file no. Pl. ÚS 77/06, in view of the

content and purpose of the original bill, it could not have been an

amending proposal. The content and purpose of both proposals are

diametrically opposed (regulation of the commercial register and the

buy-out right). Deputy Doležal’s amending proposal does not contain any

supplemental material, change, or deletion of any provision proposed by

Deputy Pospíšil. Thus, regulation of a fundamental issue was implemented

through an add-on.

 

13.

Therefore, for all the cited reasons, the petitioner requests annulment

of the regulation of the buy-out right, as the effect of the

fundamental defects listed in points 6 to 11, and the defects in

legislative procedure, make the legal regulation unconstitutional. Here

we must state that the last filing, which was to summarize the

petitioner’s arguments, does not contain a single specifically argued

objection that the contested legal regulation of the institution of a

forced buy-out is unconstitutional. For that, we would also have to look

at the petitioner’s original petition, file no. Pl. ÚS 53/05, which

argued that this legal framework violates Art. 1 of the Constitution of

the CR and Art. 4 par. 4 and Art. 11 par. 4 of the Charter of

Fundamental Rights and Freedoms (the “Charter”).

 

14.

The original petition, over and above the summary, contained the

following constitutional law arguments. According to the petitioner, the

legal regulation of the buy-out right contained in §183i to §183n of

the Com. Code is a procedure described in Art. 11 par. 4 of the Charter;

it is expropriation in the form of taking shares away from their

current owners to the benefit of another subject. A number of European

courts have already ruled that in similar cases taking away shares in

exchange for compensation violates property rights. In this regard, the

petitioner stated that the legal regulation of a squeeze-out does not

meet the conditions provided in Art. 11 par. 4, Art. 4 par. 4 of the

Charter and Art. 1 of the Constitution of the CR. It supported this by

saying that the issue of a buy-out of securities against the will of

their owners, in particular the issue of compensation for expropriation,

is regulated in a manner that practically makes impossible for the

dispossessed investors any effective defense against abuse of the right,

and thus puts them in a completely unequal position (see below). These

investors do not have sufficient time to prepare for the shareholder

meeting or to be able to decide whether the amount of consideration is

set correctly. Also, investors are not protected in any way against

abuse of the right in the calling of a shareholder meeting, the process

of setting the amount of consideration permits arbitrariness by the

principal shareholder and makes the parties to a legal relationship

unequal, the process of reviewing the correctness or adequacy of the

consideration is not governed by clear and understandable rules, and the

commercial register registration proceeding does not provide protection

for them.

 

15.

Even if this were not a case of expropriation, an expropriating action

by the state still takes place. Without registration in the commercial

register, i.e. without an action by the state, the transfer of ownership

can not occur. According to decisions of the European Court of Human

Rights cited by the petitioner (e.g. James and Others v. the United

Kingdom, 1986), this is actually expropriation, because it is classified

under the second rule of Art. 1, second sentence, of Protocol No. 1 to

the European Convention (deprivation of property). Therefore, the

decision in James and Others must be applied to the squeeze-out much

more than the decision in the Bramelid matter, because the role of the

state (registration in the commercial register) is far more significant

in that case. Moreover, the description is not as important as the role

of the state. The idea that an investor would deserve greater protection

when deprived of property for the benefit of the state (expropriation)

than when deprived of property for the benefit of another private

investor is absurd. Yet, this difference can be documented in the new

regulation in Act no. 184/2006 Coll., on Deprivation or Limitation of

Ownership of Land or a Building (the Expropriation Act). Although it may

be granted that the right to shares does not enjoy the same protection

as ownership of other things, that does not mean that shareholders

deprived of property under §183i et seq. of the Com. Code should have

virtually no rights and guarantees.

 

16.

As regards the deadline for calling a shareholder meeting, commentaries

on this issue disagree markedly on whether it is possible to shorten

the time between the notice date and the date of the shareholder meeting

to a period shorter than 30 days. According to one view, §181 par. 1 a 2

of the Com. Code must be applied to this case, and thus the statutory

30-day period between the notice date and the shareholder meeting date,

provided in §184 par. 4 of the Com. Code, can be shortened to 15 days.

However, §181 par. 1 of the Com. Code, which permits calling a

shareholder meeting in a shorter period, does not apply to cases that

are envisioned in §183i et seq. of the Com. Code, for these reasons:

a)

§183i par. 1 of the Com. Code speaks expressly of a “shareholder

meeting,” whereas §181 of the Com. Code speaks of “an extraordinary

shareholder meeting.” Thus, §181 of the Com. Code can not be applied to

procedures under §183i of the Com. Code;

b)

another reason for this is the nature of §181 of the Com. Code, which

is intended to protect the minority, and not to make life easier for

majority shareholders (here the petitioner pointed to the view in Havel

B., Doležil T.: A zase ten squeeze-out: Úvahy nad interpretací §183i et

seq. ObchZ [And There’s That Squeeze-Out Again: Thoughts on the

Interpretation of §183i et seq. of the Commercial Code], Právní rozhledy

[Legal Perspectives], vol. 2005, no. 17, pp. 634-635). The provision of

§181 of the Com. Code is also meant to speed up the process when it is

necessary to quickly intervene in the management of a company, or when

it is necessary to quickly obtain information from the board of

directors. However, that is not the case with §183i of the Com. Code,

where neither the company nor the principal shareholder is under any

time pressure, and where, on the contrary, it is necessary to provide

sufficient time to the squeezed-out shareholders;

c)

further, none of the provisions concerning the buy-out of securities

refers to §181 of the Com. Code. The provision of §183j of the Com. Code

is a lex specialis to §184 par. 4 of the Com. Code. Likewise, §181 of

the Com. Code is a lex specialis in relation to §184 par. 4 of the Com.

Code. It is obvious from the foregoing that both §181 of the Com. Code,

and §183j of the Com. Code are special provisions in relation to the

general §184 par. 4 of the Com. Code. However, no special relationship

can be concluded to exist between §181 and 183i et seq. of the Com.

Code;

d) in a buy-out, minority

shareholders are in the position of dispossessed persons, whose

ownership of shares is taken away from them against their will. Thus, in

this case the requirement of a sufficiently long period of time to

prepare for the shareholder meeting should be accentuated, and not

suppressed to the benefit of the expropriating principal shareholder.

According

to the petitioner, some important experts have completely opposite

opinions. This proves that the legal regulation is, in this regard,

unclear, uncertain, and deceptive, and does not meet the requirements

imposed on a law-based state in Art. 1 of the Constitution of the CR.

 

17.

The petitioner also criticized the process of setting the amount of

consideration. The legislature creates an impression of objectivity in

setting the amount of consideration by including experts in the process

of determining the amount. A fundamental element of every modern society

is the law of voluntary transfer of ownership. Involuntary transfer of

ownership is an exception, for which there must always be clear and

strict rules. The regulation in §183i et seq. of the Com. Code does not

meet that requirement. Contractual negotiation of a price is replaced by

a unilateral setting of a “purchase price” (consideration) by the

principal shareholder. If the consent of one of the parties is to be

involuntary, or unwanted transactions with the price for the transfer

replaced by a decision by the other party to the transaction, then

documentation by an expert appraisal that it is correct and objective

must meet strict criteria of objectivity, both in terms of the choice of

the expert and the conduct of the appraisal, and in terms of the

possibility for review of it. In cases of squeeze-out, however, the

principal shareholder selects the expert for this purpose, and also sets

the amount of the expert’s compensation (§183j par. 6 of the Com.

Code). That, of course, must have an effect on the question of the

expert’s independence or lack thereof. Also there is no guarantee that

the principal shareholder must respect an expert’s appraisal with which

it disagrees. For that reason, the expert “documentation” of the price

is purely a formal matter, without practical significance for protecting

the dispossessed investors, and does not represent any protection of

the rights of dispossessed persons. The objection that the expert is

responsible for a defective appraisal and is liable for any damages

caused, can not stand in view of the values that are at stake here.

 

18.

Payment of consideration for the buy-out is not adequately ensured. The

original provision about this (§183m par. 5 of the Com. Code) was

annulled by the Act on Financial Conglomerates. That Act introduced the

obligation to deposit part of the consideration in a bank account or

with a securities broker. Even this new element does not adequately

ensure payment of the consideration set by the principal shareholder.

The term bank can be understood to mean any bank, even a bank doing

business in a jurisdiction that is not accessible to Czech shareholders.

In addition, the amendment made by the Act on Financial Conglomerates

transfers the obligation to provide consideration from the principal

shareholder (see the current wording of §183m par. 3 and 4 of the Com.

Code, implemented by the Act on Financial Conglomerates) to the

securities broker or the bank. Thus, there a further legal uncertainty

arises as to who is actually responsible to “provide consideration.”

Logically, it should be the principal shareholder. Under the current

wording of §183 m par. 3 and 4 of the Com. Code “consideration will be

provided by the securities broker or the bank,” so it is as if the

obligation was on these two subjects. It is obviously unfair vis-à-vis

the entitled persons whose fundamental right (ownership) is being taken

away, that the legislature exposes them to such a high degree of

uncertain regarding the foregoing matters. It is not reasonable for such

considerable conflicts in the law, and its lack of clarity, in a

situation where the fundamental right to peaceful enjoyment of property

is taken away from hundreds of thousands of citizens to not be addressed

until the stage of the case law of the courts.

 

19.

The petitioner includes among the defects of the review proceeding

under §183k of the Com. Code the unclear definition of the circle of

parties (point a), the kind of proceeding (point b), the complaint

(point c), and the expiration of the right to appeal the inadequate

consideration.

a) The text of the

Commercial Code does not make clear the circle of parties to review

proceedings. The logic of the matter indicates that parties to the

proceedings should be a petitioner (one of the minority shareholders)

and the principal shareholder. However, that is not expressly stated

anywhere, and, on the contrary, §183k par. 3 of the Com. Code provides

that “a court ruling … shall be binding on the principal shareholder and

the company with regard to the basis ….” Thus, according to this

provision the court decision is also addressed to the company. If only

the principal shareholder were a party to the proceeding, that sentence

would not make sense. It is not at all apparent what role the company is

to play in the proceeding. That is addressed by the new formulation of

§183m par. 3 and 4 of the Com. Code (implemented by the Act on Financial

Conglomerates), according to which the obligation to provide the

consideration is the securities broker or the bank;

b)

the text of §183k par. 1 of the Com. Code does not address the issue of

the kind of proceeding. One can not infer from the words “may ask a

court to review the adequacy of the consideration” whether the

proceedings is adversarial or not. If analogy is made to §220p par. 4 of

the Com. Code, which also provides a “right to ask for review of the

adequacy of the consideration” in connection with transfer of business

assets, it must be noted that that provision is also not clear. The High

Court in Olomouc, in its decision ref. no. 8 Cmo 171/2005-731, stated

that a proceeding on review of adequate settlement is a non-adversarial

proceeding. In contrast, the High Court in Prague believes that it is an

adversarial proceeding. The petitioner believes that an issue as

serious as determining the kind of proceeding in issues where citizens

are deprived against their will of a fundamental right (ownership) can

not be left to the development of case law, but must be regulated

precisely in terms of the requirements imposed on a law-based state

(Art. 1 of the Constitution of the CR);

c)

it is not clear from the text of §183k par. 1 of the Com. Code whether

the verdict is to be for performance, determination, or otherwise. The

provision of §183k par. 3 of the Com. Code speaks mysteriously of

according “the right to a different amount of consideration,” and

paragraph 4 then speaks of a “determination of inadequacy.” Thus, the

law does not clearly answer the question of the kind of complaint. The

problem can not be removed, even by analogy with §220p of the Com. Code.

The text of §220p par. 4 of the Com. Code, i.e. the words “the right to

ask for review of the amount of consideration in money,” also does not

make it clear what kind of complaint is involved (for performance, for

determination, or another kind). Likewise, in practice one finds various

interpretations, which the petitioner documents using the example of an

opinion in the expert literature, where Dědič J. and others state, in

Obchodní zákoník, Komentář [Commercial Code, Commentary], Polygon 2002,

part II., p. 2865, that it is a complaint for performance, whereas §17

par. 1 of Act no. 627/2004 Coll. cites a complain for determination. The

foregoing indicates that §183i of the Com. Code is an uncertain legal

regulation that does not meet the requirements of being precise, certain

and foreseeable, defined by the Constitutional Court in the matter file

no. Pl. ÚS 44/03. The same also applies to §183k of the Com. Code;

d)

§183k par. 2 of the Com. Code precludes the right to appeal based on

the inadequacy of the consideration. The provision of §183k par. 3, last

sentence, of the Com. Code, on the other hand, sets the point when the

period of limitations begins to run vis-à-vis all entitled persons,

regardless of whether they were parties to the proceeding. The term “all

entitled persons” is not defined, and evidently must be interpreted as

the group of owners of securities. If it meant only persons who filed

subsequent or parallel petitions for review, then the words “regardless

of whether they were parties to the proceeding” would make no sense.

Thus, the result of both these provisions is either a) the absurd

situation that the right will first expire (because the entitled person

does not file a petition for review, and as a result there is no

proceeding in which it could be a party), and after it expires the

period of limitations apparently begins to run from the moment a

decision based on the petition of another party goes into legal effect,

or b) there are two different rights, the right to review (which expires

if no entitled person files a petition for review) and a right to

supplemental payment (which apparently expires after the general period

of limitations). The absurdity of that situation is also pointed out by

the authors of the Komentář k obchodnímu zákoníku [Commentary on the

Commercial Code], Štenglová I. et al. (supplement to the 10th edition of

the Commentary, C. H. Beck, p. 88).

 

20.

Under Art. 4 par. 4 of the Charter, in employing the provisions

concerning limitations upon the fundamental rights and basic freedoms,

the essence and significance of these rights and freedoms must be

preserved. That means, among other things, that the legal framework

connected with the limitation of a fundamental right (here, the right to

peaceful enjoyment of property) must meet high requirements of clarity,

understandability, and foreseeability (see the Constitutional Court’s

decision in the matter file no. Pl. ÚS 44/03, under which a provision in

a legal regulation of a democratic, law-based state must also meet the

requirements of sufficient precision, certainty, and foreseeability).

This rule must apply twice as much in the case of interference that

consists of the total deprivation of ownership. In addition, it is

necessary that persons whose fundamental right is affected not be

subject to disproportionately high burdens in the proceeding that is to

lead to review of the compensation for the expropriation. In this

regard, the petitioner provided arguments that, in its opinion,

demonstrate these failings. Therefore, it is incorrect to leave it up to

the courts, in their case law, to remove imprecision and lack of

clarity if these have accumulated in one institution to such a great

extent, in matters where the fundamental rights of citizens are

affected, in view of the constitutional principle set forth in Art. 4

par. 4 of the Charter. The legal regulation of a squeeze-out of minority

shareholders does not meet the requirement of proportionality between

the means used for the limitation (removal) of the property right and

the aim pursued. Also, the essence and significance of the fundamental

right is not preserved at all (Art. 4 par. 4 of the Charter). Some

individual conflicts or unclear points in the existing legal regulation

could apparently be removed by a constitutional interpretation (perhaps,

e.g. the kind of proceeding or the kind of complaint). However, a

number of unclear points can not be removed even through a

constitutional interpretation. Even if it were possible, it is unfair

for the burden of removing such serious unclear points in a statute, and

in such an extent in which they appear in §183i to 183n of the Com.

Code, to be borne by the person whose rights, in contrast, the

legislature should have preserved, under Art. 4 par. 4 of the Charter.

The petitioner is convinced that it is impermissible, and inconsistent

with Art. 4 par. 4 of the Charter, for all the risks connected with the

legal regulation of the right to buy out securities to be borne by the

person whose rights were supposed to have been preserved when passing

the provisions on the limitations of fundamental rights, i.e. the

minority investor.

 

21.

Finally, it is necessary to set forth the petitioner’s objections about

the role of the Czech National Bank (originally that of the Securities

Commission – the petitioner did not change the name). In its opinion,

the amendment of the buy-out regulation by the Act on Financial

Conglomerates does not remove the objection that there is no objective

determination of the amount of consideration (which would be capable of

objectively replacing the process of negotiating a purchase price), for

these reasons:

a) the Securities

Commission itself publicly announced that it is not capable of

evaluating the adequacy of the settlement, in particular in the case of

companies whose shares are unlisted (see the Securities Commission’s

press releases);

b) under the

amendment implemented by Act no. 377/2005 Coll., the fiction set forth

in §183e of the Com. Code applies proportionately to actions by the

Securities Commission. Under that provision: if the Securities

Commission does not send its opinion on the takeover bid to the bidder

by the deadline provided in paragraph 8 (i.e. within a period of 8 days –

extended to 15 business days), or does not grant the required consent

to the acquisition of the securities of the target company or prohibit

the takeover bid within that time period, it is deemed to consent to the

takeover bid. Thus, this is not a measure that would effectively solve

the problem of objective determination of the amount of consideration,

because in a number of cases (in particular with companies whose shares

are unlisted) review by the Securities Commission need not take place at

all;

 

c)

the Commentary to the Commercial Code – supplement to the 10th edition,

C. H. Beck, Prague, 2005, p. 83, states that with unlisted shares it is

not necessary to obtain the prior consent of the Securities Commission.

Thus, for these securities there would be no objective evaluation of

the amount of consideration. However, even if the Securities Commission

had the authority to review the amount of consideration for unlisted

shares, it has no authority at all to require from companies with

unlisted shares any information whatsoever, based on which it could

conduct a review.

 

22.

As regards the petitioner’s objections regarding the regulation of the

commercial register registration proceeding, the Constitutional Court

separated that out to be treated in the proceeding conducted under file

no. Pl. ÚS 43/05, and refers to the conclusion therein.

 

 

II.

Statements from the Parties to the Proceeding

 

23.

In view of the course of proceedings in the adjudicated matter, the

Constitutional Court twice requested position statements from the

parties to the proceeding on the petition to annul §183i to §183n of the

Com. Code. The first time was in the proceeding under pod file no. Pl.

ÚS 43/05, and then, in view of the gradual supplementing of arguments by

the petitioner, the parties were asked for a second position statement.

 

24.

In the position statement of 16 November 2005, the chairman of the

Chamber of Deputies of the Parliament of the Czech Republic described

the process of passing Act no. 216/2005 Coll., and stated that in

discussing the contested Act, the legislative assembly acted in

accordance with legal procedures, and that its vote expressed the belief

that the Act is not inconsistent with the constitutional order of the

Czech Republic. He attached the text of the amending proposal by Deputy

Doležal, amending proposals – publication 566/4, the approved text of

the Act– publication 566/5, the stenographic transcript of the third

reading from 9 February 2004, and resolutions of the Chamber of

Deputies, no. 1457 and no. 1626.

25.

In the position statement of 16 November 2005, the chairman of the

Senate of the Parliament of the Czech Republic described the process of

discussion of the draft Act by the Senate of the Parliament of the Czech

Republic. As regards the contested provisions, §183i to §183n of the

Com. Code, he pointed to the fact that a number of the criticized

inadequacies were already removed in part nine of Act no. 377/2005

Coll., on Supplemental Supervision of Banks, Savings and Credit

Cooperatives, Electronic Funds Institutions, Insurance Companies, and

Securities Brokers in Financial Conglomerates, and Amending Certain

Other Acts (the Act on Financial Conglomerates). Here he pointed to the

role of the Securities Commission (now of the Czech National Bank),

which is supposed to guarantee minority shareholders just compensation

for their shares, in the name of the state. Likewise, consideration is

now ensured by transferring the funds to be paid to a securities broker

or a bank. Regarding the failure to respect the principle of

proportionality, he stated that the securities broker or bank is

required to provide the consideration to entitled persons without

unnecessary delay after ownership is registered in an asset account in

the appropriate securities register. At the same time, he pointed to a

number of unclear points in the regulation – the commercial register

does not guarantee the legality of the squeeze-out process, the unclear

circle of parties in the review proceeding, unclear kind of proceeding

(adversarial – non-adversarial), kind of complaint, and unfair

allocation of costs of the review proceeding. In discussion amendments

of the Commercial Code, the Senate of the Parliament of the Czech

Republic did not consider these issues in detail, because it started

with the position that the regulation interferes in the rights of

minority shareholders, and thus violates rights guaranteed by the

Charter. He also emphasized that the Thirteenth Directive does permit a

squeeze-out, but, in Art. 16 also requires the right of a sell-out,

which is a mirror institution of the buy-out right. He also addressed

the contested provision of §200da par. 3 of the CPC.

 

26.

The position statement from the Securities Commission pointed to

foreign regulations and to the Thirteenth Directive, which permits a

decision on a squeeze-out only in the event that such a decision by the

principal shareholder is preceded by a takeover bid, and requires member

states to ensure that owners of the remaining securities receive a fair

price. The legal character of the shareholder meeting resolution is

disputable; the Securities Commission inclines to the opinion that this

is not expropriation, but that there is a palpable interference in the

rights of minority shareholders which, however, is not necessarily

unconstitutional, if it takes place with reference to public values,

with legislative arbitrariness in the construction of the regulation

being ruled out, and if the principle of proportionality was respected

(with reference to judgment no. 181/2005 Coll.). The Commission agreed

with the petitioner in its arguments on the requirement of a

proportionate, fair compensation (full compensation). This must also be

manifest in the actions of the expert, who should first conduct a

strategic analysis of the company, analysis of revenues, strengths and

weaknesses (SWOT analysis), and financial analysis. Only after that can

the expert choose the most suitable appraisal method, which is usually

the discounted cash flow method, and determine the present value of the

company. The Commission believes that, in view of the uniqueness of each

valued company, the rules for forming an expert appraisal can not take

the form of a binding legal regulation. In that regard, the Securities

Commission considers the rules in §183i par. 5 of the Com. Code to be

consistent with the requirement for full compensation. Likewise, it did

not agree with the petitioner regarding the expert being dependent on

the principal shareholder. It referred to its methodology for setting an

appropriate price in takeover bids. This methodology can also be used

in a squeeze-out. The Commission sees a problem in the short time period

under §183i par. 5 of the Com. Code, when it can review only the

suitability and justifiability of the expert methods applied, the

correctness of calculations, and perhaps distortion and manipulation. In

the Czech Republic, in view of the illiquid market, the price on the

regulated marked can differ substantially from the adequate value; with

unlisted companies it is not possible to apply the criterion of a market

price at all. The question of interest is also a problem, as is the

lack of determining a time as of which the value of consideration is to

be set. As regards the procedural regulation of the buy-out, in the

Securities Commission’s opinion the requirements based on which the

constitutionality of a squeeze-out can be evaluated include the

opportunity to turn to a court, clear definition of rules of the

proceeding, addressing the information deficit on the part of minority

shareholders, securing the position of minority shareholders who did not

turn to a court, and regulating the costs of the proceeding so that

they are not an obstacle to filing a complaint.

 

 

III.

New Facts and Supplemental Statements by the Parties to the Proceeding

 

27.

After the issue of the buy-out was separated out into the proceeding

conducted under file no. Pl. ÚS 56/05, several points were added to the

original filing, and it was further expanded. Therefore, the judge

rapporteur asked for supplements to the original position statements, so

that parties to the proceeding would have an opportunity to respond to

the petitioner’s complete arguments. Also, a position statement was

requested from the Czech National Bank, which had in the meantime taken

over the tasks previously fulfilled by the Securities Commission, based

on the Act on Financial Conglomerates.

 

28.

The chairman of the Chamber of Deputies of the Parliament of the Czech

Republic, Ing. Miloslav Vlček, first stated that the Chamber had already

stated its position on the legislative process (see point 24). The

measures governing the right to buy out securities were introduced into

Act no. 513/1991 Coll. through an amendment implemented by Act no.

216/2005 Coll., based on a proposal from deputies, in the second

reading. Another amendment to these provisions was contained in Act no.

377/2005 Coll., on Financial Conglomerates. Amending proposals were made

in the second reading, and, according to the justification, they were

presented in order to take into account European Parliament and Council

Directive 2004/25/ES of 21 April 2004, on takeover bids. He did not

comment on the manner in which these amending proposals were submitted,

which was criticized by the petitioner. As regards the alleged defects

in the legal regulation of a forced buy-out, i.e. the deadline for

calling a shareholder meeting, questioning the guarantee of legality of

the transaction through the institution of registering the shareholder

meeting resolution in the commercial register, in connection with §220da

of the CPC (the correct section is §200da of the CPC), the

impossibility of setting the amount of consideration in an objective

manner, lack of clarity concerning who bears the obligation to pay the

consideration to the minority shareholder, defects in the provision on

the review proceedings, and preclusion of the right to appeal based on

inadequate consideration or unfair allocation of the costs of the review

proceeding, he stated generally that these legal regulations were

approved in the Chamber of Deputies of the Parliament of the Czech

Republic with the intention of simplifying a company’s shareholder

structure and permitting more effective decision-making in the company’s

affairs. The proposed changes were also supposed to be a response to a

number of actual cases where minority shareholders, in a manner verging

on chicanery, abused the exercise of their rights to the detriment of

the company as a whole and its growth. All this, despite the fact that

ownership of a majority share carries not only greater responsibility

for administration and management, but also the greater economic risk

that the principal shareholder undertakes, compared to the minority. He

stated that a number of leading Czech experts in the field also incline

toward this opinion in their analyses. Minority shareholders are a group

of shareholders whose influence on the operation of a company with a

principal shareholder that meets the conditions for exercising the

buy-out right is negligible. Therefore, the proponent of the amendment

considered the squeeze-out to be a standard institution for balancing

the rights and responsibilities of the majority shareholder vis-à-vis

minority shareholders in the administration and management of the

company, and also argued that there is a need to respond in a timely

manner to the provisions of European directives, i.e. the already

existing European Parliament and Council Directive 2004/25/ES of 21

April 2004 on takeover bids. This Council directive imposes an

obligation on member states to ensure that the squeeze-out bidder hold

(or be about to hold) at least 90% of the registered capital holding

voting rights, and 90% of the voting rights of the target company. In

view of the regulation of the number of votes (based on voting rights),

contained in §180 par. 2 of the Com. Code, the number of votes should

correspond to the proportion held of the company’s registered capital.

Thus, the requirements for the takeover bidder are de facto met

cumulatively – although it does not seem that way at first glance under

the formal wording of §183i par. 1 of the Com. Code. He stated again

that, when passing this regulation, the legislative body acted in the

belief that the statute was consistent with the constitutional order and

with international treaties by which the Czech Republic is bound.

 

29.

The chairman of the Senate of the Parliament of the Czech Republic,

MUDr. Přemysl Sobotka, in the supplementary position statement of 18

September 2007, responded to the new facts that the supplemented

petition contains. He stated that, as regards the objection of an

“add-on,” Constitutional Court judgment file no. Pl. ÚS 77/06 states

that an “add-on” is described as a procedure “where the mechanism of an

amending proposal to a statute attaches a change to a completely

different statute, not related to the legislative proposal.” The

contested statute is more a case of a “legislative rider,” because

Deputy Doležal’s supplement does not implement a new statute into the

legislative proposal, but merely deviates from the narrow space defined

for amending proposals by the legislative proposal. He stressed the

fundamental importance of evaluating this issue for the creation of

future laws. As regards the other objections, he stated that, because a

corporation is a capital company, where the rights and obligations of

shareholders are incorporated in individual shares, it is natural that a

shareholder holding the majority of shares also has greater rights, if

these rights are not limited by statute. However, the petitioners

consider the limitations in the Commercial Code to be insufficient. The

failure to respect the “principle of equal weapons,” which they allege,

can be considered disputable, because respecting it fully would go

against the spirit of capital companies, and lead to useless equalizing

in business corporations. As regards the objection that nothing is

reviewed in proceedings before the commercial register court, he stated

that, all registration in the commercial register is based on that

principle since the amendment of the Commercial Code by Act no. 216/2005

Coll. A shareholder meeting is declared invalid by an independent

court, which applied §131 of the Com. Code. The law clearly and

unambiguously defines the cases where the court will not declare a

meeting invalid. Therefore, he did not agree with the petitioners’

objections. He also pointed to the decision of the German Constitutional

Court of May 2007, which concluded that squeezing out minority

shareholders is not a violation of the right to own property, if the

interests of minority and majority shareholders are reasonably balanced

out, in particular if the squeezed-out shareholders receive adequate

compensation for their shares and are given effective legal protection.

 

30.

The governor of the Czech National Bank, doc. Ing. Zdeněk Tůma, CSc.,

responded on its behalf. He primarily emphasized that the squeeze-out

regulation in the Commercial Code can not be considered an

implementating regulation. In the opinion of the Czech National Bank,

individual inconsistencies between the current Czech legal framework and

European law do not justify a conclusion that the entire squeeze-out

regulation is unconstitutional, unless it is found to be inconsistent

with the constitutional order on other grounds, even if some of the

current provisions governing the buy-out right were annulled due to

inconsistency with European law, on the basis of the decision by the

European Court of Justice on a preliminary issue under Art. 234 of the

Treaty Establishing the European Communities (the “TEC”). The currently

valid legal regulation can not be considered a preliminary transposition

of the Thirteenth Directive, which would, moreover be inconsistent with

community law, for the following reasons:

a)

the legal regulation of the buy-out of securities, passed on the basis

of the deputies’ proposal, was not intended to implement the Thirteenth

Directive, and therefore one can not speak of an implementing regulation

of the squeeze-out in the Commercial Code;

b)

the current legal regulation of the buy-out of securities is within the

bounds of TEC (Art. 10 par. 2, Art. 249), as it is interpreted by the

European Court of Justice (decision in the matter Wallonie v Région

wallone, C - 129/96 Inter-Environnement Wallonie ASBL v Région wallone,

[1997] European Court Reports I - 7411.1);

c)

in the Commercial Code, unlike in the Thirteenth Directive, the right

to a forced buy-out of securities is conceived as a general right, and

thus applies to a wider circle of cases than that provided in Art. 1 of

the Directive. The Directive applies only to a squeeze-out after a

takeover bid for listed securities, and, in the opinion of the Czech

National Bank, Art. 1 merely indicates that other domestic rules

governing the buy-out of securities are not affected by the Thirteenth

Directive. Here he pointed to recital 24 in the preamble to the

Thirteenth Directive, from which one can not conclude that the exception

would apply only to states that permitted a forced buy-out of

securities at the time the Thirteenth Directive was passed. Therefore,

the objections submitted have a community dimension only in relation to a

squeeze-out that follows a successful takeover bid in a listed company,

which is of fundamental importance for evaluating whether the valid

Czech legal regulation is capable of seriously endangering the aims set

by the Thirteenth Directive. Regarding the conditions that must be met

for exercising the right of a forced buy-out (alleged to be inconsistent

with Art. 15 of the Thirteenth Directive) the governor of the Czech

National Bank stated that in practice such a case has not yet happened.

Nonetheless, it must be admitted that the Czech legal regulation is

inconsistent with the Thirteenth Directive, but with the reservation of

what was stated above under points a) to c). As regards the objection

that the right to a buy-out of securities is not related to the right to

a sell-out, at the request of a minority shareholder, he stated that

§183h of the Commercial Code governs an offer to redeem shares, even

though it can not be confused with the institution described by the

English term “sell-out.” He also pointed to the preparation of a new

regulation of a “supplemental” takeover bid. Regarding the objection

that the principles for setting the price in situation where, after a

takeover bid, the threshold is reached for exercising the right to a

buy-out of securities are not consistent with the Thirteenth Directive,

the governor of the Czech National Bank stated that the valid legal

regulation is not unambiguously directly inconsistent with the

Thirteenth Directive. He pointed to §183i par. 5 of the Com. Code and

stressed that the Czech National Bank always evaluates whether the

amount of consideration is adequate to the value of the securities, and

in cases of doubt it takes into account the interest of the owners of

the securities. Thus, the Commercial Code permits an interpretation

whereby the aims pursued by the Thirteenth Directive are not marred or

endangered. In addition, the Czech National Bank already has an

obligation to take into account the price in a takeover bid that

preceded the squeeze-out, an obligation that arises for the bank from

the obligation to interpret domestic law in a manner that conforms to

European law. In addition, he pointed to the amendment being prepared of

§183n par. 1 of the Com. Code, where this issue is to be expressly

addressed on the basis of Art. 15 par. 5, second sub-paragraph of the

Thirteenth Directive.

 

31.

The Constitutional Court received an amicus curiae brief from the

Association for Protection of Small Shareholders (the APSS) that

basically contains the same arguments as those presented by the

petitioner, and documents it with practical examples. At the

organization’s request this was included in the file.

 

 

IV.

Formal Prerequisites for Reviewing the Petition and Constitutionality of the Legislative Process

 

32.

On this basis it was possible to turn to addressing whether the

conditions for proceedings before the Constitutional Court have been

met. The petition was filed by a group of seventeen senators, the

minimum number required for submitting such a petition. Under the case

law of the Constitutional Court (judgment file no. Pl. ÚS 1/92,

Collection of Decisions of the Constitutional Court of the CSFR,

judgment no. 14) for this issue it is sufficient for the condition to be

met at the time the petition is filed. The expiration of a senator’s

term in office (in that case the condition had to be met for all members

of the petitioning group) or the termination of the office in some

other manner (under Art. 25 of the Constitution of the CR) do not affect

evaluation of whether there is an entitled petitioner under §64 par. 1

let. a) of the Act on the Constitutional Court.

 

33.

In view of the formulation of the petition, the Constitutional Court

first addressed clarifying the question of what, according to the

petition, is the subject matter of the proceeding. The petitioner filed a

petition seeking the annulment of “part of a statute, §183i to §183n of

Act no. 513/1991 Coll., the Commercial Code.” In technical legislative

terms, the Commercial Code does not contain any such provisions.

Nonetheless, it was possible to conclude from the individual filings

that the petition intended these provisions of the Commercial Code, i.e.

of Act no. 513/1991 Coll., as amended by Act no. 216/2005 Coll., Act

no. 377/2005 Coll., and finally (considering the last, summary filing,

though not expressly) as amended by Act no. 57/2006 Coll. The text of

the Commercial Code provisions contested by the petition is as follows:

 

Right to Buy Out Securities (Squeeze-Out)

 

§183i

(1) A person who owns in a company,

a) securities whose total nominal value is equal to at least 90% of the company’s registered capital, or

b) securities that replace securities whose total nominal value is equal to at least 90% of the company’s registered capital, or

c)

securities to which at least 90% voting rights are attached with regard

to the voting in such company, (the “principal shareholder,”),

is

entitled to ask the board of directors to call a shareholder meeting

that will decide to transfer all the other securities in the company to

it (the principal shareholder).

(2)

At least nine tenths of the votes of all the shareholder are necessary

for the shareholder meeting to adopt such a resolution, and in the

owners of preference shares and the principal shareholder are entitled

to vote. A notarial deed on the shareholder meeting’s resolution shall

be prepared, and an expert’s appraisal on the amount of consideration in

cash for the securities shall be attached to it.

(3)

The shareholder meeting’s resolution shall also include the

identification of the principal shareholder, documentation that such

shareholder is in fact the principal shareholder, the amount of

consideration determined under §183j par. 6 and the time-limit for

providing the consideration.

(4)

For purposes of determining a business share under par. 1, the company’s

securities that are part of the company’s assets [held by the company]

shall be divided among owners of securities in the ratio of the nominal

values of their securities.

(5)

The prior approval of the Czech National Bank, not older than 3 months,

is required for the adoption of the shareholder meeting’s resolution on

transfer of all the company’s other securities to the principal

shareholder, otherwise the shareholder meeting’s resolution is invalid.

The provisions of section 183e shall apply as appropriate; the

time-limit provided in section §183e par. 8 shall be extended to 15

business days. The principal shareholder is a party to the proceeding.

The Czech National Bank shall always consider whether the amount of

consideration is adequate to the value of the securities, and when

evaluating the adequacy of the amount of consideration it shall always

take into account the fact that a shareholders is deprived of the

opportunity to choose whether and when to transfer to securities to the

principal shareholder; if in doubt, the Czech National Bank shall take

into account the interest of the shareholders.

(6)

Before the shareholder meeting is held, the principal shareholder is

required obliged to transfer to a securities brokerage firm or a bank

funds in an amount necessary to pay the consideration, and shall

document that fact to the shareholder meeting. The payment of the

consideration shall be effected by the bank or brokerage firm.

 

 

§183j

(1)

The board of directors shall call a shareholder meeting with 15 days of

delivery of a request under §183i par. 1 to the company.

(2)

The invitation to the shareholder meeting, or notice of the shareholder

meeting, must include the decisive information on the determination of

consideration, the conclusions of an expert appraisal, if required, and a

call on lien creditors, who are known to the company or who should be

known to the company if acting with due care, to inform the company of

any liens on securities issued by the company, and the opinion of the

board of directors as to whether it considers the amount of

consideration determined under par. 6 to be fair.

(3)

The company shall make available at its registered address, for every

shareholder to view, identification of the principal shareholder, the

expert appraisal under paragraph. 6, and the Czech national Bank’s

ruling (decision) under §183i par. 5; §184 par. 8, second and third

sentences, shall apply as appropriate. A company with listed shares

shall also disclose information regarding the procedure under section

§183i par. 1 and the conclusions of the expert appraisal, if it is

required, in a manner that permits remote access.

(4)

The draft (wording) of the shareholder meeting’s resolution with regard

to determination of the amount of consideration may not diverge from

the justification of the amount or from the expert appraisal under par.

6.

(5) After learning of the

convening of the shareholder meeting, the owners of pledged securities

shall communicate to the company, without undue delay, the fact that

their securities are subject to a lien and who is the relevant lien

creditor (pledgee); a notice of this duty (to inform the company) shall

be included in an invitation to the shareholder meeting or in a notice

publicizing that the shareholder meeting will be held.

(6)

Together with the request under §183i par., the primary shareholder

shall deliver to the company justification for the determination of the

amount of consideration, an expert appraisal and the Czech National

Bank’s ruling under §183i par. 5; the principal shareholder shall bear

the cost for the preparation and delivery of these documents.

 

 

§183k

(1)

As of the time they receive an invitation to the shareholder meeting or

a notice of the shareholder meeting, shareholders may ask a court to

review the adequacy of the consideration; if this right is not exercised

within one month of the day when the record of the shareholder meeting

resolution is published by entry in the Commercial register under

section §183l, this right shall expire.

(2) If a shareholder does not exercise his right under par. 1, he may no longer invoke the inadequacy of consideration.

(3)

A court ruling which has accorded the right to a different amount of

consideration shall be binding on the principal shareholder and the

company with regard to the basis of such accorded right vis-à-vis the

other shareholders. The period of limitations shall start to run as of

the day when the ruling comes into legal force, for all entitled

persons, regardless of whether they were parties to the proceeding.

(4)

A determination of inadequacy of the amount of consideration shall not

invalidate the resolution of a shareholder meeting under §183i par. 1.

(5)

A petition to declare invalid a resolution of a shareholder meeting

under section §131 may not be based on the inadequacy of the amount of

consideration.

 

 

§183l

(1)

After the adoption of the shareholder meeting resolution, the board of

directors shall file, without undue delay, an application to enter the

resolution in the Commercial Register.

(2)

At the same time, the board of directors shall publish the shareholder

meeting resolution and the conclusions of the expert appraisal, if

required, in the manner prescribed for calling a shareholder meeting,

and shall deposit the notarial deed at the company’s registered address

for inspection; this fact shall also be stated in the published notice.

(3)

One month after the resolution is published by being entered in the

Commercial Register under par. 1, the title to securities of the

minority shareholders shall pass to the principal shareholder.

(4)

If the transferred securities were subject to a lien (pledged

securities), the lien shall extinguish at the time of the transfer.

Paragraphs 5 and 6 shall apply, as appropriate, to a lien creditor who

holds a pledged security.

(5) The

previous shareholders of certificated securities shall present them to

the company within 30 days after the transfer of title; during any time

when they are in default with this obligation, they may not demand

consideration under section §183m. Within the same time-limit, the

company shall instruct the person authorized keep the relevant records

of securities under a special legal regulation to record in the asset

accounts the change of shareholders of uncertificated (book-entry)

securities; the basis for recording the change is the shareholder

meeting resolution under §183i par. 1.

(6)

If the previous shareholders do not present their securities to the

company within one month, or within an additional time-limit determined

by the company, which may not be shorter than 14 days, the company shall

proceed pursuant to section §214 par. 1 to 3.

(7)

The company shall deliver the returned securities to the principal

shareholder without undue delay. To replace securities that have been

declared invalid, the board of directors shall issue to the principal

shareholder, without undue delay, new securities of the same form,

nature, class and nominal value.

 

 

§183m

(1)

Entitled persons are entitled to receive consideration in cash; the

amount of consideration shall be determined by the principal

shareholder, and its adequacy shall be supported by an expert appraisal,

which may not be older than 3 months as of the day a request under

§183i par. 1 is delivered. The amount shall be reviewed by the Czech

National Bank.

(2) As of the

entry of title to an asset account in the relevant securities register,

the previous shareholders of uncertificated (book-entry) shares has a

right to be paid the consideration; the previous shareholders of

certificated shares have the same right as of the delivery of the shares

to the company uhder §183l par. 5 a 6.

(3)

The brokerage firm or bank shall provide consideration to the entitled

person without undue delay after the conditions under paragraph 2 have

been fulfilled.

(4) The brokerage

firm or bank shall always provide consideration to the shareholder from

whom the securities have been bought out unless it is proved that such

securities are subject to a lien (pledged securities), in which case the

brokerage firm or bank shall provide consideration to the lien creditor

(pledgee); this shall not apply if the owner proves that the lien has

expired or that the agreement between him and the lien creditor provides

otherwise.

 

 

§183n

(1)

Upon publication of the shareholder meeting resolution, the securities

are removed from trading on the official market if they were listed;

§186a par. 1 and 2 shall not apply. In accordance with a special legal

regulation, the company shall inform the organizer of the regulated

market on which the securities were traded under §186a (1) of the

removal, and ask that it be reflected in the relevant listings.

(2)

The organizer of the regulated market shall, without undue delay,

inform the relevant depositary and the Czech National Bank that the

securities have been removed from trading on the regulated market.

(3)

The right of the principal shareholder under section §183i par. 1 that

is not exercised within 3 months after the day of acquiring a decisive

business share shall extinguish.

 

34.

The Constitutional Court, pursuant to §68 par. 2 of the Act on the

Constitutional Court, first considered the manner in which the contested

§183i to §183n of the Com. Code were passed and promulgated. These

provisions were inserted into the Commercial Code by Act no. 216/2005

Coll., Amending Act no. 513/1991 Coll., the Commercial Code, as amended

by later regulations, Act no. 99/1963 Coll., the Civil Procedure Code,

as amended by later regulations, Act no. 189/1994 Coll., on Higher Court

Officials, as amended by later regulations, and Act no. 358/1992 Coll.,

on Notaries and their Activities (the Notarial Code), as amended by

later regulations. The Act was promulgated on 3 June 2005, in part no.

77/2005 of the Collection of Laws of the Czech Republic. They were

subsequently partly amended by Act no. 377/2005 Coll., on Supplemental

Supervision of Banks, Savings and Credit Cooperatives, Electronic Funds

Institutions, Insurance Companies, and Securities Brokers in Financial

Conglomerates, and Amending Certain Other Acts (the Act on Financial

Conglomerates). That Act was promulgated on 29 September 2005 in part

no. 132/2005 of the Collection of Laws of the Czech Republic. The second

amendment took place in connection with the new regulation of

supervision of the financial market by Act no. 57/2006 Coll., on the

Amendment of Acts in Connection with Unifying Supervision of the

Financial Market. As a result of this amendment in §183i par. 5 and §183

par. 2 of the Com. Code, the role of the Securities Commission was

transferred to the Czech National Bank.

 

35.

The digital library of the Chamber of Deputies of the Parliament of the

Czech Republic yields this basic information. The draft of Act no.

216/2005 Coll. was originally submitted as a deputy proposal by Deputy

Pospíšil (Publication no. 566. Chamber of Deputies. IV. term of office,

2005). The first reading of the bill in publication no. 566 took place

in the Chamber of Deputies of the Parliament of the Czech Republic on 2

April 2004. The bill was assigned for review to the constitutional law

committee and the economics committee. The constitutional law committee

discussed the bill on 20 October 2004 and passed resolution no. 143 (set

forth in publication no. 566/2), containing a comprehensive amending

proposal. The economics committee reviewed and approved the bill on 11

November 2004 in resolution no. 269 (set forth in publication no.

566/3), as amended by a comprehensive amending proposal matching the

constitutional law committee. In the second reading on 24 November 2004,

at the 38th session of the Chamber of Deputies of the Parliament of the

Czech Republic, the bill was, among other things, expanded to include a

proposal by Deputy Doležal. Deputy Doležal had already given it to both

committees, but they did not agree with it, and did not include it in

their comprehensive amending proposal. The bill was passed in the 3rd

reading, and included in a final bill (vote no. 32, results 120 in

favor, 53 against, with 186 members of the Chamber of Deputies of the

Parliament of the Czech Republic present and voting). The final bill was

approved on 9 February 2005, at the 41st session of the Chamber of

Deputies of the Parliament of the Czech Republic in vote no. 39, by 182

votes out of 185 deputies present.

 

36.

The Senate of the Parliament of the Czech Republic discussed the bill

on 31 March 2005 at its 4th session, and passed resolution no. 104, in

which it returned the bill to the Chamber of Deputies of the Parliament

of the Czech Republic with amending proposal. Out of 69 senators

present, 64 voted in favor, and none were against. The Chamber of

Deputies of the Parliament of the Czech Republic discussed the bill

again on 5 May 2005 at its 44th session, and in resolution no. 1626 kept

the original wording of the bill by 135 votes out of 193 present; two

members of the Chamber of Deputies of the Parliament of the Czech

Republic were against. It must be noted that one of the amending

proposals from the Senate of the Parliament of the Czech Republic was

directed specifically at deleting the newly-inserted provisions of §183i

to §183n of the Com. Code (the proposal by Deputy Doležal). However,

that proposal received only 91 votes out of 189 present. The president

of the republic signed the Act, and it was promulgated on 3 June 2005 in

part no. 77/2005 of the Collection of Laws of the Czech Republic. It

did not go into effect all at once; some of the provisions went into

effect on the day they were promulgated, and some on 1 July 2005.

 

37.

Shortly after that, the Commercial Code was amended again by Act no.

377/2005 Coll., on Supplemental Supervision of Banks, Savings and Credit

Cooperatives, Electronic Funds Institutions, Insurance Companies, and

Securities Brokers in Financial Conglomerates, and Amending Certain

Other Acts (the Act on Financial Conglomerates). This was done by a

government bill (Publication no. 835. Chamber of Deputies. IV. term of

office, 2005). The government bill, apart from its own subject matter

(financial conglomerates) contained amendments to laws in certain

sectors in the area of supervision of the activities of banks, insurance

companies, and securities brokers, i.e. the Act on Banks, the Act on

the Czech National Bank, the Act on Insurance Companies, the Act on

Doing Business in the Capital Market, and the Act on Savings and Loan

Cooperatives, but not an amendment of the relevant part of the

Commercial Code. In the first reading, which took place on 14 December

2004 at the 39th session of the Chamber of Deputies of the Parliament of

the Czech Republic, the bill was sent for review to the budget

committee. The budget committee reviewed the bill on 11 March 2005, and

in resolution no. 496 of 2 March 2005 it postponed discussion of that

point until 9 March 2005. At the 41st meeting of the budget committee,

which took place on 9 March 2005, in resolution no. 520 the committee

recommended to the Chamber of Deputies of the Parliament of the Czech

Republic, that it approve the government draft of the Act on

Supplemental Supervision of Banks, Savings and Credit Cooperatives,

Electronic Funds Institutions, Insurance Companies, and Securities

Brokers in Financial Conglomerates, and Amending Certain Other Acts (the

Act on Financial Conglomerates), as amended by the passed amending

proposals (see Chamber of Deputies publication no. 835/2). At the 42nd

session of the Chamber of Deputies of the Parliament of the Czech

Republic, after general discussion in the 2nd reading (on 23 March

2005), the bill was sent back to the budget committee for further

review. The budget committee reviewed the bill at its 45th meeting on 8

June 2005, and in resolution no. 597 it approved the bill, with comments

that became part of the resolution (see Chamber of Deputies publication

no. 835/3). The bill again went through general discussion at the 45th

session of the Chamber of Deputies of the Parliament of the Czech

Republic, on 17 June 2005, where more amending proposals were made (see

Chamber of Deputies publication no. 835/4). In the third reading, which

took place on 1 July 2005, at the same session of the Chamber of

Deputies of the Parliament of the Czech Republic, the bill was approved

in vote no. 690 by 152 votes out of 158 deputies; no one was against.

This Act was also expanded by a number of amending proposals that did

not concern its main subject matter, i.e. supplemental supervision. The

original six parts of the bill were changed, but in addition a further

28 parts were inserted, including part nine, which amends certain

provisions of the Commercial Code on the buy-out right. The Senate of

the Parliament of the Czech Republic returned the bill to the Chamber of

Deputies of the Parliament of the Czech Republic with amending

proposals that also concerned changes in the regulation of the buy-out

right. The bill returned by the Senate of the Parliament of the Czech

Republic was put to a vote on 19 August 2005 at the 46th session of the

Chamber of Deputies of the Parliament of the Czech Republic. The Chamber

of Deputies of the Parliament of the Czech Republic, with 180 deputies

present, kept the original version of the Act (resolution no. 1835) by

the votes of 147 deputies; there was one vote against.

 

38.

The last amendment of the provisions in question was implemented by Act

no. 57/2006 Coll., on the Amendment of Acts in Connection with Unifying

Supervision of the Financial Market, in Art. XLII, part 23. This

involved replacing the Securities Commission with the Czech National

Bank, which also acquired the Securities Commission’s role in the

buy-out right (§183i par. 5 and §183n par. 2 of the Com. Code). No other

changes were made to the right of a forced buy-out. This change was

originally not in the bill (Publication no. 997. Chamber of Deputies.

IV. term of office. 2005). It was included in the comprehensive amending

proposal from the budget committee (Publication no. 997/5). Because the

proposal was not delivered orally, it is not possible to determine from

the stenographic transcript when it was made. However, there is no

doubt that this was a proposal that was substantively related to the

subject matter under discussion, as it was only in the course of

reviewing the bill that the budget committee proposed that the

Securities Commission be dissolved and its role taken over by the Czech

National Bank. The Chamber of Deputies of the Parliament of the Czech

Republic approved the bill at its 51st session on 7 December 2005, in

vote no. 696, where 181 deputies were present, 163 voted in favor, and

one vote was against. The bill was approved by the Senate of the

Parliament of the Czech Republic on 2 February 2006 at the 9th session

of its 5th term office, by the votes of 43 senators to 17, out of 69

senators present.

 

39.

The above-described approval process for the contested legal regulation

indicates primarily that the part of Act no. 216/2005 Coll. that is the

subject matter of this proceeding, i.e. the part on the right of a

forced buy-out, is not the result of a legislative initiative under Art.

41 par. 1 of the Constitution of the CR. Deputy Pospíšil submitted the

original bill on 20 January 2004, as a standard deputy initiative, in

publication no. 566. That bill passed the first reading. In the 2nd

reading, on 24 November 2004, in general discussion, Deputy V. Doležal

said: “I hate to disrupt the idyll that arose during discussion of this

bill, but I would like to announce the submission of an amending

proposal concerning the so-called “squeeze-out.” To tell the truth, I

want to tell you that it was reviewed both with the proponent, who has

accepted it, and with the minister, who agrees with it. It was even

submitted to the constitutional law committee and the economics

committee, sufficiently in advance so that the committees could study

it. I do not know whether they failed to find the strength, courage and

inclination to consider it, but it did not appear in their resolutions.

Therefore, I am submitting it. You all received it on the table

yesterday in written form; I won’t read out the entire proposal. I would

just like to point out that it is an amendment to the Commercial Code,

that follows from the Thirteenth Directive of the European Union, and it

is one of the things that await us sooner or later, so it is better to

include it right away. As it was placed on everyone’s desk yesterday,

together with justification of all the changes, I don’t want to disrupt

the idyll here any further. I will hereby only sign up for detailed

discussion, where I would change my amending proposal so that it could

be included in the comprehensive amending proposal from the

constitutional law committee.” This proposal was approved as part of the

amending proposals (publication 566/4, point C). It was on the agenda

of the Chamber of Deputies of the Parliament of the Czech Republic again

during the repeat discussion of the bill that was returned to the

Chamber of Deputies of the Parliament of the Czech Republic by the

Senate of the Parliament of the Czech Republic. Because the Senate of

the Parliament of the Czech Republic proposed deleting the right of a

forced buy-out, there was a danger that the law as a whole would not be

passed. That is documented by the statement of the bill’s original

proponent, Deputy Pospíšil, who at the 44th session, on 3 May 2005, in

an attempt to preserve the meaning of the original bill, declared:

“Ladies and gentlemen, in conclusion I would like to repeat the words of

Deputy Vrbík, and call upon you. The material that we are discussing

has been discussed by the Chamber of Deputies for almost a year. Teams

of experts, and the legal teams of the Civic Democratic Party, together

with the legal teams of ex-Minister Bureš, worked on it. Few materials

are discussed in such detail in the legislative process. Few materials

achieve such agreement in the Chamber of Deputies across the political

spectrum. Few materials will help the Czech entrepreneurial public this

much. Therefore, I ask you, ladies and gentlemen, when discussing this

material – we will vote on the Senate version and then the Chamber of

Deputies version – whatever your opinion of the squeeze-out is, I beg

you to remember that the statute itself regulates the proceedings before

the commercial registers, and that this bill is very important for the

Czech entrepreneurial public.” Thus, the very discussion in the Chamber

of Deputies of the Parliament of the Czech Republic, as in the Senate of

the Parliament of the Czech Republic (see the speeches by the

proponent, Deputy Pospíšil and Senators Kubín, Paukrtová, Stodůlka, and

Sefzig at the 4th session of the Senate of the Parliament of the Czech

Republic, on 31 March 2005) documents that Deputy Doležal’s amending

proposal was seen as something unrelated to the originally presented

proposal to amend the Commercial Code and the Civil Procedure Code

(commercial register proceedings). A similar situation arose during the

passage of the first amendment to the right of a forced buy-out by Act

no. 377/2005 Coll., where amendment of this regulation was inserted in

the form of an amending proposal from Deputy Doležal.

 

40.

The Constitutional Court is of the opinion that evaluating the manner

in which the contested provisions of the Act were proposed, discussed,

and approved is part of evaluating whether the Act was passed in a

constitutionally prescribed manner (§68 par. 2 of the Act on the

Constitutional Court). The proposal by Deputy Doležal does not change or

supplement the proposal submitted by Deputy Pospíšil. That concerns a

different issue, though it also presupposes the existence of the

commercial register and registration in it. Therefore, the

Constitutional Court first had to deal with the question of whether

passing Act no. 216/2005 Coll., did not involve a serious violation of

the rules of legislative procedure, which should lead to annulling the

Act on those grounds (see judgment Pl. ÚS 77/06, no. 37/2007 Coll.).

 

41.

In the Constitutional Court’s opinion (see judgment no. 37/2007 Coll.),

deviating from the limited space reserved for amending proposals can

acquire the character of exceeding the purpose of a given proposal, or

exceeding the scope of the subject matter defined by a bill. This

requirement of a close relationship or immediate connection between the

content and purpose of a bill and an amending proposal to it is part of

the foundations of parliamentary methods and orderly law. It brings a

necessary order into the discussion of laws and parliamentary procedure

in general. However, every state, and within it, often every legislative

assembly, often seeks its own means for how to ensure that this

requirement be met, or sets special rules for deviation from its bounds

(e.g. a higher, qualified majority, the support of a certain number of

other deputies, a response or consent from the proponent, or new

discussion of a bill). Likewise, the intensity of judicial review of

observance of these rules differs among individual states. Therefore,

there is no universal position on this issue. The Constitutional Court

outlined its approach in the above-cited judgment, where it emphasized

that there is an “add-on” in a case where the method of an amending

proposal to a bill is used to attach to the bill a regulation of a

completely different statute, not related to the legislative proposal.

In the Constitutional Court’s opinion, constitutional interpretation of

the provisions governing the right to file amending proposals to a bill

under discussion requires that “the amending proposal truly only amend

the proposed legal regulation, i.e., in accordance with the requirements

of the so-called close relationship rule, under which the amending

proposal must concern the same subject matter as the proposal currently

being discussed in the legislative process, the particular amending

proposal should not deviate from the limited space reserved for amending

proposals by extensively exceeding the subject matter of the bill being

discussed.” The right to submit amending proposals is part of the

constitutional formation of will by the parliament of a democratic

state. However, an amending proposal is, by its nature, an accessory to a

bill that was submitted in the form of a constitution-forming

initiative under Art. 41 of the Constitution of the CR. Therefore, §63

par. 1 point 5 let. a) of the rules of procedure of the Chamber of

Deputies of the Parliament of the Czech Republic requires that it

delete, expand, or amend certain parts “of the original proposal.” The

foundation for parliamentary discussion is that original proposal, on

which comments are made by the government, under Art. 44 par. 1 of the

Constitution of the CR, committees to whom the bill was sent, or

individual deputies, under §91 par. 4 of the rules of procedure of the

Chamber of Deputies of the Parliament of the Czech Republic. If that is

not the case, then in the Constitutional Court’s opinion the separation

of powers is violated. That has consequences for the principle of

creating harmonious, understandable, and foreseeable law, which the

Constitutional Court has previously connected to the attributes of a

democratic, law-based state. Further, it circumvents the institution of a

legislative initiative under Art. 41 of the Constitution of the CR, and

violation of the right of the government to express its view on a bill

under Art. 44 of the Constitution of the CR.

 

42.

Of course, the situation in this case is not completely identically to

the one that the Constitutional Court considered in the cited judgment.

Publication no. 566 contained Deputy Jiří Pospíšil’s proposal to pass a

law amending Act no. 513/1991 Coll., the Commercial Code, as amended by

later regulations, and Act no. 99/1963 Coll., the Civil Procedure Code,

as amended by later regulations. in terms of content, it concerned §3 of

the Com. Code, which was to be repealed, and §27 to §34o of the Com.

Code, where part one, chapter three, concerning the commercial register,

was to be revised, and finally §200a to §200df of the CPC, concerning

proceedings in matters of the commercial register. It could not

substantively concern the right of a forced buy-out (§183i to §183n of

the Com. Code), because that only entered the Commercial Code in the

abovementioned proposal from Deputy Doležal. Of course, that is not

important for the evaluation of whether Deputy Doležal’s proposal is

permissible. In that case, in contrast, the question is evaluating the

substantive relationship of an amending proposal to the original

proposal. The starting point for evaluating the cited narrow

relationship, or relationship on the merits, is the “original proposal,”

.i.e. the legislative initiative (the amending statute) under Art. 41

of the Constitution of the CR, not the statute that is the target of the

initiative (the statute to be amended). Therefore, the decisive

question is not whether the subject matter of the amendment is the

Commercial Code (broad relationship), but whether this involves

amendment of the regulation of the commercial register in the Commercial

Code and commercial register proceedings in the Civil Procedure Code

(narrow relationship).

 

43.

Thus, the connection between Deputy Pospíšil’s original proposal and

Deputy Doležal’s amending proposal is only formal, not substantive. It

is primarily the seriousness of such a proposal that speaks against its

permissibility. The government did not have an opportunity to express

its views on the proposal, although it is responsible to the Chamber of

Deputies of the Parliament of the Czech Republic on issues of the

conduct of domestic and foreign policy. The Thirteenth Directive

involves fulfillment of an obligation arising from membership in the

European Union. An amending proposal is not ruled out, but it affects

the status of the government as the representative of the Czech Republic

in its relationship to the European Union. The amending proposal

concerns matters regulated by the Commercial Code, and does not insert

in the original proposal a regulation that would affect a completely

different statute. However, if affects Deputy Pospíšil’s original

proposal only indirectly, and only because these matters are registered

in the commercial register, in a manner that does not permit judicial

review. Deputy Pospíšil himself said (at the 4th session of the Senate

on 31 March 2005) that “the submitted bill did not aim to significantly

change the valid substantive law regulation in the Commercial Code

concerning commercial registers. In lay terms, our proposal does not

basically change the facts that are registered in the commercial

register under the present commercial law.”

 

44.

Of course, the Constitutional Court pointed out in judgment no. 37/2007

Coll., that it will connect past evaluation of analogous violations of

principles of the legislative process with the test of proportionality,

in connection with principles of protecting the citizens’ justified

confidence in the law, legal certainty, and acquired rights, or in

connection to other constitutionally protected principles, fundamental

rights, freedoms, or public values. Therefore, the Constitutional Court

also had to evaluate other circumstances in the case, so that its role

would not be limited to review of hundreds of procedural errors in both

chambers and their managing bodies, without that having any effect on

the evaluation of substantive constitutionality of the legal order. If

the Constitutional Court began granting similarly justified petitions to

annul statutes simply on procedural grounds on the border between the

constitutional order and orderly law, a state of considerable legal

uncertainty would arise, especially where there were otherwise no

substantive grounds on which to criticize the contested statute.

Therefore, it was also necessary to evaluate the circumstances that

should lead the Constitutional Court to not limit itself merely to

reviewing observance of a close relationship between the original

proposal and the amending proposal.

 

45.

The fact that a forced buy-out is registered in the commercial register

(§183l par. 1 of the Com. Code), and that the manner of that

registration under §200da of the CPC is the subject of proceedings

before the Constitutional Court conducted under file no. Pl. ÚS 43/06,

speak in favor of that relationship. If this regulation were found

unconstitutional, that would also have consequences for that proceeding.

We also can not overlook the fact that judgment no. 37/2007 Coll.

concerned a statute that had not yet been passed. In the initial case of

Art. II and Art. III of Act no. 443/2006 Coll., which amend Act no.

319/2001 Coll., which amends Act no. 21/1992 Coll., on banks, as amended

by later regulations, the statute had not yet been applied. In

addition, application of the state would have been basically a one-time

matter. In contrast, the present matter concerns regulation of the right

to a forced buy-out, which has already been amended twice. Thus, the

government had an opportunity to express its opinion and exercise its

own legislative initiative. In contrast to the initial case, this

regulation has already been applied many times in practice, where – as

in theory – it provoked a number of disputes, which the Constitutional

Court is expected to resolve, both by the public, and, especially, by

the courts dealing with commercial law. This also applied to the

legislature, which is to transpose the Thirteenth Directive into

domestic law, in the form of an act on takeover bids (Chamber of

Deputies. Publication no. 358 of 14 November 2007), and to the judicial

branch. Here we must point out that in judgment file no. Pl. ÚS 23/04

(č. 331/2005 Coll.), the Constitutional Court favored restraint in

evaluating the legislative process itself. In such a case, formal

annulment of the regulation of the right to a forced buy-out as a whole

(nothing else comes into consideration in this case) would mean the

danger that the same regulation would be passed again, but simply with

the difference that all the requirements of the legislative process

would be observed. The Constitutional Court concluded that in the

present matter, in view of the principle of proportionality, the formal

and procedural aspects of the review cede to the requirements of the

principles of a material law-based state, legal certainty, and effective

protection of constitutionality.

 

 

V.

Evaluation of the Constitutionality of the Regulation of the Right to a Buy-Out

 

46.

In its summary filing of 28 February 2007, the petitioner states that

the Czech legal regulation of the buy-out of securities demonstrates a

great number of defects, the combined effect of which is that the

regulation is inconsistent with the right to peaceful enjoyment of

property and with the right to a fair trial, as well as with European

community law and international law. However, as the above summary of

the criticisms indicates, in most cases it does not make them specific

in terms of the requirements that arise from Art. 87 par. 1 let. a) of

the Constitution of the CR. In contrast to the previous filings, it

ranked in first place the alleged conflict with community law, without

specifying in more detail how that would also mean that intervention by

the Constitutional Court under Art. 87 par. 1 let. a) of the

Constitution of the CR was necessary. Therefore, it was also necessary

to turn to the petitioner’s earlier filings, which more distinctly

included a certain constitutional law analysis (points 13 to 22).

47.

A fundamental question is evaluation of the constitutionality of the

institution of a forced buy-out, both in terms of the constitutional

order of the Czech Republic [Art. 87 par. 1 let. a) of the Constitution

of the CR], and in terms of the Czech Republic’s international

obligations under Art. 1 par. 2 of the Constitution of the CR. In this

regard it was necessary to deal with the alleged violation of Art. 11

par. 4 of the Charter, and, in particular, with the question of possible

interference in property rights under Art. 11 par. 1 a 3 of the

Charter, even though the petitioner does not based its petition on those

provisions. In this regard, it was necessary to evaluate whether:

 

a)

regardless of the Thirteenth Directive, the constitutional order

permits such interference in property rights, and whether the criterion

for defining the principal and minority shareholders satisfies the

principle of proportional interference;

 

b)

whether the interference is legitimate and rational, when the law does

not set forth the grounds for exercising the right to a forced buy-out,

and whether it corresponds to the nature and idiosyncrasies of

relationships in a corporation;

 

c)

by enshrining the right of a forced buy-out, the state fulfilled its

protective role and did not permit disproportionate interference in

property rights;

d) the

interference meets the conditions set forth in Art. 4 par. 2 and Art. 11

of the Charter and Art. 1 of the Protocol to the European Convention;

e) there was not interference in acquired rights and violation of the principle of legitimate expectation.

 

48.

Before the Constitutional Court formed an opinion on the foregoing

questions, it was necessary to deal with the last version of the

petitioner’s filing, which is based primarily on an alleged conflict

between the regulation of the right to a forced buy-out and the

Thirteenth Directive (points 6 and 7). Here we can not but state what

the Constitutional Court has already stated several times (in

particular, judgments Pl. ÚS 50/04, no. 154/2006 Coll. and Pl. ÚS 36/05,

no. 67/2007 Coll.). The reference point for review of the

constitutionality of statutes under Art. 87 par. 1 let. a) and Art. 88

par. 2 of the Constitution of the CR is the constitutional order. The

Constitutional Court does not have jurisdiction, in such proceedings, to

review whether domestic law is consistent with community law. The

application of community law as directly applicable law (see decision of

the European court of Justice, matter 106/77, Amministrazione delle

Finanze dello Stato v Simmenthal SpA. Reference a preliminary ruling:

Pretura di Susa - Italy. The non-use of a statute that is inconsistent

with the law of the Community, known to the domestic court as Simmenthal

II, available in the Collection of Decisions, vol. 1978, p. 629, e.g.

at eur-lex.europa.eu) is in the jurisdiction of the ordinary

courts, which, in cases of doubt about the application of the law, have

the opportunity, or obligation, to turn to the European Court of Justice

with a preliminary issue under Art. 234 of the TEC. From the point of

view of the reference criteria for decision-making by the Constitutional

Court this changes nothing. An obligation arises from Art. 1 par. 2 of

the Constitution of the CR for the Constitutional Court, as a state

body, of the Czech Republic, to make an interpretation of the

constitutional order consistent with European law (see also judgment

file no. Pl. ÚS 66/04, no. 434/2006 Coll., in relation to European Union

law) in those areas where community law and the legal order of the

Czech Republic meet (the undertaking of loyalty under Art. 10 of the

TEC). Of course, it has to be a matter of interpretation of the

constitutional order in relation to domestic law. However, the

petitioner asks that the Constitutional Court decide on its allegations

concerning defective transposition of community law. Therefore, the

Constitutional Court left them aside. If the petitioner limited itself

only to those allegations, the petition would have to be denied due to

lack of jurisdiction of the Constitutional Court. Of course, in cases of

annulling legal regulations, the Constitutional Court must take

European Union membership into account in terms of Art. 1 par. 2 of the

Constitution of the CR, and weigh the possible use of the opportunities

given to it by §70 par. 1 of the Act on the Constitutional Court.

 

49.

The same applies to the allegation of not respecting unspecified

international treaties on the protection of investments. This is also a

question of application of such treaties in the decision-making of the

ordinary courts, which are bound by such treaties, provided that they

meet the requirements of Art. 10 of the Constitution of the CR. If such a

treaties contains a different legal regulation, it is necessary to

apply the principle that the treaty takes precedence. Because this is

not a problem of a hierarchy of relationships (according to legal

force), but a hierarchy of application, we must refer to the rules

enshrined in Art. 10 and Art. 95 par. 1 of the Constitution of the CR.

 

50.

The Constitutional Court likewise set aside those of the petitioner’s

allegations that are merely aimed at the request to interpret ordinary

law. Lack of clarity in a statutory regulation must be eliminated by the

case law of the ordinary courts, and eliminating lack of unity in the

decision-making of the ordinary courts falls under the jurisdiction of

the Supreme Court. The Constitutional Court has already stated several

times that it can intervene in this area only if there is simultaneously

a violation of the constitutional order, and the lack of precision,

uncertainty, and lack of foreseeability of a legal regulation extremely

violates the fundamental requirements of a statute in the context of a

law-based state.

 

51.

Therefore, the fundamental issue is the constitutional permissibility

of a forced buy-out of shares in a law-based state (Art. 1 par. 1 of the

Constitution of the CR) in terms of the requirement of legality,

rational justification (prohibition of arbitrariness), necessity, legal

certainty, foreseeability, and the certainty of law. Only after

answering that question is it possible to evaluate whether the

individual features of the buy-out regulation meet constitutional

criteria. On that basis it was possible to decide whether the regulation

would be annulled as a whole, or only individual parts of it. In

judgment file no. Pl. ÚS 59/2000 (no. 278/2001 Coll.) the Constitutional

Court stressed the importance of economic actors for the interpretation

of provisions of the constitutional order that govern issues of the

functioning of a market economy. Therefore, it is necessary to approach

the interpretation of provisions on a forced buy-out from the standpoint

of the idiosyncrasies of the area to which they are to be applied, and

from which the problems arise that are to be legally regulated. A

corporation has a different character than a trade union, association,

political party, or religious society. Likewise, the same standards can

not be used to evaluate the fulfillment of constitutional requirements

on the creation, functioning, and termination of such a company.

Membership in it, based on owning shares, can not be compared with

paying membership fees, nor a squeeze-out of minority shareholders with

the expulsion of a member from a society or a political party. For that

reason, the understanding of shareholders as owners, compared to owners

of other property, is also the subject of discussion, especially in the

case of minority owners (so-called passive owners – see further, Lee,

J.: Four Models of Minority Shareholder Protection in Takeovers.

European Business Law Review, vol. 2005, no. 4, p. 809). The purpose of a

corporation is the concentration of capital, investment, conduct of

business, and earning profits. If one of the shareholders reaches the

specified proportion of shares under §183i par. 1 and 4 of the Com.

Code, a situation arises in the corporation where the remaining

shareholders may (but need not) cease to be a benefit for the company.

This applies both in terms of the importance of their proportion of the

company’s total capital, and in terms of their ability to affect

decision-making in the company. On the contrary, their involvement may

burden the company in terms of costs for its operation, calling

shareholder meetings, and its decision-making with regard to the rights

of those shareholders. A high number of small shareholders may (but need

not) represent unnecessarily increased costs of administration and

management for the company. A corporation has an unchanged obligation

toward such shareholders, even though their possible contribution to

further development, to making strategic and other decisions, is

practically zero. Most of these arguments are part of a background

report by a group of experts to the Thirteenth Directive, known as the

Winter Report (after the chairman of the group, Jaap Winter – text of

the Report of the High Level Group of Company Law Experts on Issues

Related to Takeover Bids. Available at

ec.europa.eu/internal_market/company/docs/takeoverbids/2002-01-hlg-report_en.pdf,

p. 60-61). At present the dominant opinion is that corporations require

a flexible legal framework to attain their strategic goals, which can

not always be achieved by entering into agreements. Therefore, the

legislature should create the necessary conditions (van der Elst, Ch.,

van den Steen, L.: Squeezing and Selling-out – a Patchwork of Rules in

Five European Member States. European Company Law, vol. 2007, no. 1, p.

25). Another important factor in the conditions in the Czech Republic is

the coupon privatization, which created a substantially different type

of corporate shareholder structure than exists in the states whose

experience and legal frameworks the petitioner cites. For that reason,

comparison with states where such a mass event did not take place is not

wholly appropriate. The Constitutional Court merely points out this

aspect, without stating an opinion on the suitability of coupon

privatization (see judgment file no. Pl. ÚS 38/01, Collection of

Decisions of the Constitutional Court of the CR, vol. 29, p. 357). The

same applies to deliberation in terms of the need to implement the

institution of a forced buy-out on grounds of competitiveness and

increasing the interest of foreign investors in doing business in the

domestic market.

 

52.

The status of shareholders can not be compared with membership rights

in other kinds of associations and societies. A shareholder’s business

share results from the size of his investment and the risk that he bears

on that basis. Therefore, shareholders have different rights (for an

overview, see Dědič, J. a kol.: Akciové společnosti [Corporations]. 6th

ed., Prague 2007, pp. 235-238) and different obligations. If a

shareholder owns 90% of a company’s shares, the influence of the

remaining shareholders on the company’s operation is negligible, and

their opportunity to participate in basic decisions about the company’s

direction is illusory. The right to an explanation and the obligation to

inform may complicate the principal shareholder’s strategic decisions.

Such decisions can also be contested as a form of abuse of the majority

votes in a company to the detriment of a minority (§56a of the Com.

Code). The mere possibility of such disputes can impede the business

aims of the principal shareholder. It is impossible not to see that the

prohibition on abuse of position can objective limit the principal

shareholder in view of the presence of the remaining shareholder. In

contrast, a reference to the possible abuse of their rights is not

decisive in this regard. Whereas, in the case of a 90% share, the

elements of participation, business, and capital apply in full in the

case of the principal shareholder, a minority shareholder (or

shareholders) takes part only in terms of capital, as an investor, while

the decision-making element is, in practice, suppressed. If minority

shareholders are ensured adequate compensation for such an investment,

it is not possible to object on constitutional grounds to a forced

buy-out under such conditions. Likewise, it can not be ruled out that

such a provision can also benefit minority shareholders, because under

certain conditions their shares lose value and become un-sellable,

because there is no interest in them. Therefore, in a certain situation

creating a legal framework for a forced buy-out of shares can also be

seen as giving an advantage to minority shareholders in terms of

increasing the interest for a takeover of the corporation. A potential

buyer is generally interested only in acquiring the company as a whole,

which can have a beneficial effect on the share price (e.g.. Münchener

Kommentar zum Aktiengesetz [Munich Commentary on the Shares Act]. 2nd

ed., Bd. 9/1, §327a – §327f, Vorbemerkung, AktGWpĂśG. SpruchG. Munich

2004, Note no. 3). Therefore, interpretation of a legal regulation as

part of an abstract review does not clearly lead to a conclusion that

the regulation is unconstitutional. The use of a forced buy-out does not

rule out interference in the constitutionally guaranteed rights of

shareholders, but that possibility alone does not make the regulation

unconstitutional. That could happen only if the state, within its

protective function, did not provide minority shareholders means for

legal protection. The fact that constitutionally guaranteed rights may

be violated on the basis of the legal regulation of a particular

institution (e.g. detention, expulsion, expropriation, expulsion from a

society) does not make the regulation unconstitutional. That would

happen only if the constitutional “guarantees” were shown to be

fictitious.

 

53.

Regarding the general objection that this is a form of expropriation,

it must be stated that the subject that deprives the minority

shareholders of their rights is not a public authority acting in the

public interest. The forced buy-out of shares under §183i of the Com.

Code, just like the transfer of business assets to a shareholder under

§220p of the Com. Code, is a certain manner of settling property

relationships that is approved by the state, and is comparable with

other forms of property settlements in marriage, in a housing

cooperative, or between co-owners in general. Therefore, the

Constitutional Court is of the opinion that, just like the minority

shareholder, in a different position, the principal shareholder could

also turn to it. The principal shareholder is also an owner, and is also

entitled to protection of its property, company, and entrepreneurial

rights under the Charter (Art. 11 par. 1 and 3, Art. 26 par. 1 and 2), a

fact that the petitioner overlooks. If every shareholder has the right

to contest a shareholder meeting resolution in court (§183 together with

§131 par. 1 of the Com. Code), the risk of the company’s ability to act

being paralyzed is borne to a far greater extent by the principal

shareholder. Therefore this is a matter of addressing a conflict of

fundamental rights and freedoms, not of expropriation under Art. 11 par.

4 of the Charter. The issue is to create opportunities for the

shareholder meeting to change the structure of private property

relationship between the shareholders (analogously, see the opinion of

the German doctrine, Schmidt-Aβmann, E.: Der Schutz des Aktieneigentums

durch Art. 14 GG [Protection of Share Ownership through Art. 14. of the

Basic Law]. In: Der Staat des Grundgesetzes [The State of Basic Laws].

Festschrift für Peter Badura. Tübingen 2004, p. 1023), but under the

supervision of the Czech National Bank and with a guaranteed opportunity

for judicial protection. The fact that the state fulfills its

protective role does not yet mean that interference in the rights of

minority shareholders can be ascribed to it as in the case of

expropriation. This is not an isolated measure in the legal order (cf.

§142 of the Civil Code). However, if the state permits a forced buy-out

of the shares of a certain group of corporate shareholders by another

shareholder in a legally regulated manner, that regulation must meet

criteria that are analogous, although not identical to the case of

expropriation, because it is not a matter of expropriation. This applies

primarily to the protection of the constitutionally guaranteed rights

of minority shareholders, such as, first, protection of property rights

under Art. 11 par. 1 and 3 of the Charter, and the right to associate

with others for purposes of conducting business under Art. 2 par. 3,

Art. 20 par. 1 and Art. 26 par. 1 and 2 of the Charter.

 

54.

Therefore, it was on that basis that the Constitutional Court had to

evaluate, in terms of the principle of proportionality the suitability

and necessity of this possible course of action for the principal

shareholder, because this case does not primarily involve a conflict of

the public interest and a fundamental right, but a conflict of two

fundamental rights, where two subjects of private law (owners) are

opposed to each other, not a public power, acting under the rules in

Art. 2 par. 2 of the Charter, and a subject of private law, acting under

the rules in Art. 2 par. 3 of the Charter. The right to a forced

buy-out, sometimes imprecisely called a squeeze-out or freeze-out (on

the various meanings of these terms see Garza, J. J.: Rethinking

Corporate Governance: The Role of Minority Shareholders – A Comparative

Study. St. Mary’s Law Journal, vol. 1999-2000, p. 621-625) is recognized

in the legal orders of a number of countries; in the European Union it

is even presumed to exist, on the basis of transposition of the

Thirteenth Directive. In some countries the forced buy-out is limited to

corporations, e.g. in the Czech Republic, Germany, France, Italy, the

Netherlands, Great Britain, and Poland; in some it is applied generally

(in Austria, Bundesgesetz über den Ausschluss von

Minderheitsgesellschaftern [Federal Law on the Squeeze-Out of Minority

Shareholders] – GesAusG. BGBl. I., no. 75/2006). In some countries it

applies only to companies with listed shares, in some also to other

companies. The conditions under which a squeeze-out is possible also

differ. However, the measure for the Constitutional Court’s review is

not conflict or inconsistency of the contested legal regulation with

foreign regulations, but the constitutional order. The fact that the

domestic legal regulation may provide a lower standard for protection of

minority shareholder rights does not necessarily mean that it is

unconstitutional. However, nothing prevents foreign experience from

becoming a source of inspiration for perfecting the regulation. Arguing

merely on the basis that this institution exists in other states is not

in and of itself important for the present matter, unless it merely

supplements constitutional law arguments. We can not begin with a

presumption that the regulation in one state is a binding model for

other states. That, after all, is also documented by efforts at a

certain unification within the European Union, which, after more than

ten years, resulted in passing the Thirteenth Directive in 2004.

 

55.

The economic and legal grounds for the regulation of this institution

are mutually dependent. Originally a corporation made decisions on the

principle of consensus, and it was assumed that statutes can not

interfere in the relationships in the company. The vested rights theory

was applied, which was based on the position that a shareholder can not

lose certain rights without his consent. By the end of the 19th century

that theory proved to be quite unsustainable in terms of economic needs.

Therefore, it was replaced by the principle of majority decisions (see

further, Carney, W. J.: Fundamental Corporate Changes, Minority

Shareholders and Business Purposes. American Bar Foundation Research

Journal, vol. 1980, pp. 69, 77n.). With the development of the economy,

the growth of corporations and shareholders, on the basis of the

original ideas of the social nature of a company and acquired rights

(conflict between the strategy of the members and the strategy of the

investment), the tyranny of a minority with a veto power began to appear

(see further, Weiss, E. J.: The Law of Take Out Mergers: A Historical

Perspective. New York University Law Review, vol. 1981, no. 4, pp.

627-657, for Great Britain, p. 685n.). Therefore, the original ideas

were gradually replaced, and developments led to the present situation

not only in the USA, but also in individual developed European states,

and, after 2004, also within the European Union. The important thing is

that the process is regulated legally and clearly, whereby it differs

from a so-called “wild” squeeze-out, where different means are used for

the same aim, to squeeze out minority shareholders; they are not

regulated transparently, and make it possible to affect minority

shareholders who own even considerably more than 5% to 10% of shares,

the standard for the right to a forced buy-out. This institution is

understood as a legitimate supplement to the regulation of mandatory

takeover bids governed by §183b par. 1 of the Com. Code (see Dědič, J. a

kol.: Akciové společnosti [Corporations]. 6th ed., Prague 2007, p.

307).

 

56.

For the Constitutional Court, in the case of a forced buy-out, it is

essential that this economically based procedure (rationality and

suitability of interference) be legally regulated as is required in a

law-based stated (legality of interference). Therefore, it is not

necessary to consider the question of the public interest in the same

procedure as for expropriation (see also, point 66 in connection with

setting the amount of compensation). The public interest is manifested

in the principal of a market economy and freedom to do business in a

different manner, and is exercised through different means, including

the creation of suitable legal conditions for the functioning of

corporations. The principal shareholder is not guided by the public

interest under Art. 11 par. 4 of the Charter, because it is a matter for

its discretion, made possible by the Commercial Code, to decide whether

to buy out the remaining shareholders and thus become the only

shareholder, who will decide in its own discretion, without shareholder

meetings and other institutions of corporate law (“going private” in

Anglo-Saxon law). The right to a forced buy-out does not involve the

usual decision-making at a shareholder meeting. There is a qualified

majority so large that possibly objections about abuse of position are

already practically suppressed. When the qualified- majority shareholder

makes decisions, minority shareholders can not even block the actions

of a shareholder meeting under §185 par. 1 of the Com. Code, let alone

prevent the passing of basic resolutions, whether those require a simple

majority (§186 par. 1 of the Com. Code), a super-majority (§186 par. 2,

3 and 4 of the Com. Code) or are combined with a prohibition of a

simple majority requirement [requirement of a three-fourths majority]

(§186 par. 4 of the Com. Code). Given a ratio of nine to one, there is

in fact no opportunity for minority shareholders to influence the

company’s decision-making; there is only the possibility of complicating

its functioning. The requirement of a 90% qualified majority far

exceeds what is considered control of the company under §66a of the Com.

Code. In terms of the principle of proportionality, in view of such a

ratio, it is difficult to make any objections, if other safeguards for

protecting property rights are observed in the regulation of the

forced-buy out procedure (adequate consideration, legal protection).

 

57.

Permitting a forced buy-out in the Commercial Code does not mean that a

qualified-majority shareholder will always consider it necessary to buy

out the remaining shareholders. That is a matter for its business

decision, where it is limited by the deadline and conditions which,

although they will not protect the membership of minority shareholders

(the aspect of the right to association, freedom to do business, and

opportunity to decide) in the corporation, will protect their existing

business share, as expressed in the form of shares, which is a condition

for such a regulation to be constitutional (Art. 4 par. 4 of the

Charter). In the first place, the regulation must lead the principal

shareholder to weigh whether it is even worth making use of the right

provided by §183i par. 1 of the Com. Code, in a situation where it is in

full control of the company. However, as emphasized above, that arises

from the economic nature of the transaction, so on the legal side there

is no need to justify the decision to use the right to a forced buy-out

(in contrast to compensation for a buy-out). This follows from the

present concept of a market economy (compared to the situation to the

middle of the 20th century, where membership was protected), where it is

expected that the majority shareholder will itself consider whether the

costs of implementing a forced buy-out will bring it profit (see, e.g.,

Schön, W.: Der Aktionär im Verfassungsrecht [The Shareholder in

Constitutional Law]. Festschrift für Peter Ulmer. Berlin 2003, pp.

1387-1388). The role of the state and its bodies (the Czech National

Bank, a court) is not to review the outlook for whether the business

decision is correct, but to evaluate whether the statutory conditions

for taking such a step were met, and, if appropriate, provide legal

protection to the bought-out shareholders. Likewise, the connection to

an investor’s strategic aim can be concluded from §183n par. 3 of the

Com. Code, which indirectly assumes that an investor will have such an

aim when seeking to acquire a 90% share. If it does not do so at once (a

three-month deadline), it loses the opportunity.

 

58.

The 90% threshold is the result of legislative discretion; the

legislature could have set a lower or higher threshold (it is 95% in

Germany, Poland, the Netherlands, France and Belgium, and 98% in

Switzerland). That was the case in the Czech Republic for cases of

winding up a company without liquidation in the period from 31 December

2001 to 11 July 2002 (when Act no. 308/2002 Coll., amending the

Commercial Code, went into effect). In terms of the constitutional order

and maintaining the state’s protection role in the regulation of the

positions of shareholders, the 90% threshold is an expression of a

necessary limit, and does not raise any doubts, in view of the European

standard, which can be considered to be the threshold contained in the

Thirteenth Directive and used in a number of other states. Insofar as

the petitioner alleges (point 6a) that this threshold is inconsistent

with the Thirteenth Directive, we must refer to what was stated under

points 28 and 48. From the point of view of the Constitutional Court,

this is a matter or ordinary law, and fulfillment of the conditions of

§183i par. 1 of the Com. Code is a matter for the ordinary courts, not

the role of the Constitutional Court in an abstract review of the

constitutionality of a statute.

 

59.

Regarding the petitioner’s allegation (point 7), that there is a

violation of the European Convention, we must state that this is a

general allegation, not explained in detail from the point of view of

the position of minority shareholders, and merely repeats what is stated

in other points in the petition. It relies on the decision in the

matter Bramelid and Malmström v Sweden of 1982, decisions nos. 8588/79

and 8589/79, and, in particular, James and Others v. the United Kingdom

(point 15). Of course, the latter case concerns not the ownership of

shares, but the setting of the price involved in the right to buy flats

in a long-term agricultural settlement. The European Court of Human

Rights, just like the former European Commission of Human Rights, in

terms of Art. 1 of the Protocol to the European Convention, includes

corporate shares under the term “property” (expressly, the decision

Sovtransavto Holding v. Ukraine of 25 July 2002, in point 91). Of

course, in the present cases that is not disputed, and none of the

parties denies it. The fundamental issue is also not the forced buy-out

of minority shareholders (for a review of decisions concerning

corporations, see Schreuer, Ch., Kribaum, U.: The Concept of Property in

Human Rights Law and Interantional Investment Law. In: Human Rights,

Democracy and the Rule of Law. Liber amicorum Luzius Wildhaber. Zürich

etc. 2007, in particular pp. 752-758; Frowein, J. A., Peukert, W.:

Europäische Menschenrechtskonvetion [The European Human Rights

Convention]. 2nd ed. Kehl etc. 1996, p. 784), but protection from

arbitrariness by the principal shareholder and adequate legal protection

(the decision Bramelid and Malmström v. Sweden, of 12 October 1982, in

fine). We have already expressed above an opinion on the possibility of

the right of a forced buy-out itself and its relationship to

expropriation. Insofar as the petitioner continues to point to problems

related to an unclear regulation and inadequate legal protection, they

will be attended to below.

 

60.

Finally, it was necessary to consider an issue that the petitioner does

nto raise, but that is nevertheless relevant in terms of the nature of a

corporation itself, in particular in terms of the manner in which the

right of a forced buy-out entered the legal order of the Czech Republic.

Because the right to a forced buy-out is a relative new institution in

commercial law, it was necessary to evaluate whether there had been

interference in acquired rights or violation of the principle of legal

certainty. In its case law, the Constitutional Court has several times

considered the protection of acquired rights and the principle of legal

certainty, and stated that the principle of legal certainty and

citizens’ confidence in the law are an inherent part of the elements of a

law-based state, and that that procedure includes a prohibition of

retroactivity (cf. judgment file no. IV. ÚS 215/94, Pl. ÚS 33/01). Legal

theory and practice distinguish between true and false retroactivity,

because each of these kinds is viewed differently in terms of

permissibility. In the case of false retroactivity, a legal norm leaves

to the old legal regulation the issue of the creation of already

existing legal relationships, legal actions taken in the past, and

entitlements arising from them, and only changes the rights and

obligations connected with these already existing legal relationships

for the future. While true retroactivity is impermissible, with a few

exceptions, false retroactivity is basically acceptable. The present

case involves a generally accepted false retroactivity. The regulation

of a forced buy-out does not in any way affect the acquisition of

securities and the entitlements connected with them, created before the

regulation was passed; the regulation only establishes, as of the moment

it went into effect, i.e. into the future, the obligation of a minority

shareholder to tolerate interference in his property rights, on the

assumption that the conditions foreseen by the statute, which will

guarantee the permissibility of the interference from a constitutional

standpoint, are fulfilled. The annulment of the old and passage of the

new legal regulation brings with it a violation of the principle of

preserving acquired rights and interference in the confidence of an

individual in the law (cf. judgment file no. Pl. ÚS 21/96, no. 63/1997

Coll.). Under Art. VI of Act no. 216/2005 Coll., provisions concerning

the forced buy-out went into effect on 1 July 2005, with the exception

of §183i, §183k, §183l, §183m and §183n, which went into effect on the

day the Act is promulgated, i.e. on 3 June 2005. In terms of the

constitutional rules for promulgating statutes under Art. 52 of the

Constitution of the CR, there was no violation of the constitutional

order. In this regard the Constitutional Court concluded that

non-amendment of a legal regulation for the entire existence of a legal

relationship is unquestionably not part of the principle of legal

certainty. The law is a dynamic system which responds to developments

and trends in society, and therefore it is necessary that the law

acknowledge changes, depending on the needs of society, in this case in

commercial law, which is gradually developing in the Czech Republic

based on the received experience of legal regulations in developed

economies. This also applies to shareholders who acquired shares before 3

June 2005 and who could expect the possibility that their shares would

be taken over by the principal shareholder under §220p of the Com. Code,

if they became shareholders as of the date that Act no. 370/2000 Coll.

went into effect. The legal framework of a forced share buy-out was not

retroactive, and arose in a situation where the Commercial Code already

contained an analogous regulation of a so-called “false” squeeze-out.

 

61.

In conclusion, the Constitutional Court stresses in this matter that

the legitimate expectation of a shareholder does not reach the same

intensity as the legitimate expectations of owners of other property, in

view of the fact that the very nature of share ownership does not

guarantee shareholders an unchanging position, nor an absolute equality

of shareholders, because the scope of property rights is derived from

the number of shares of the same nominal value, and the nature of a

corporation gives rise the possible “risk” of a change in status of its

shareholders, especially minority shareholders (cf. decisions file no.

IV. ÚS 324/97 and IV. ÚS 720/01). Evaluation of this issue, on the basis

of tests used abroad (e.g. the fair market value price, the net asset

value method, the Delaware block method, the earnings value method, the

reasonable expectations test, the defeated expectations argument, etc. –

also in point 66, a distinction is also made between buy-outs in open

or closed companies), is ruled out as part of a proceeding on abstract

review of constitutionality, because it can include evaluating an

investor’s expectations only at a general level. In practice, however,

there is no such investor – there is always a particular corporation in a

particular situation (at the time of purchasing shares and at the time

of exercising a forced buy-out, for a buyer outside the company or

inside the company, a market price and a revenue price) and a particular

situation on the capital market (the share value depends not only on

the condition of a particular corporation). That question can be

addressed only as part of a procedure under §183i par. 5 of the Com.

Code (review by the Czech National Bank) and §183k of the Com. Code

(judicial protection of the owners of securities). In an abstract review

of the constitutionality of a statute we can only evaluate in terms of

proportionality whether interference is possible, necessary, and

desirable in terms of another fundamental right, whether protection

exists at all, and whether it is adequately guaranteed. Therefore, the

institution itself of a forced share buy-out under §183i to 183n of the

Com. Code can be considered a measure whose implementation is within the

bounds of the constitutional order of the Czech Republic.

 

62.

As regards the relationship between the main and minority shareholder,

in terms of respecting equality, it must be emphasized that the concept

of equality appears at many different levels. Therefore, a blanket

reference to the equality of shareholders, without regard to the nature

of ownership of securities, is virtually meaningless. As stated above,

very nature of share ownership does not guarantee shareholders an

unchanging position, nor an absolute equality of shareholders, because

the scope of property rights is derived from the number of shares of the

same nominal value, and the nature of a corporation gives rise the

possible “risk” of a change in status of its shareholders, especially

minority shareholders (cf. decision file no. IV. ÚS 720/01). The rules

that apply in other associations, or in other forms of decision making

(e.g. voting rights) can not be mechanically transferred to the position

of shareholders in this kind of capital company. A shareholder’s voting

rights are tied to shares (§180 par. 2 of the Com. Code). Because the

sign of a corporation and, and one of its specific features is the

possibility for one member to have more shares (not one member – one

share of the same nominal value), the positions and opportunities of the

members in such a company also differ. There is equality primarily in

terms of the size of a share in a corporation’s basic capital (shares of

the same nominal value have the same number of votes - §180 par. 2 of

the Com. Code), so from that point of view we can not speak of

inequality. That would be possible only in situations where the

Commercial Code enshrines the rights of shareholders regardless of the

number of shares they own, such as, e.g., the right to take part in a

shareholder meeting, the right to vote, the right to information, the

right to make proposals and counterproposals (§180 par. 1 of the Com.

Code), and the right to their protection (§182, §183 of the Com. Code).

From that point of view, of course, there is often, on the contrary, a

greater burden on the position of the principal shareholder, whose

investment may be threatened by the exercise of such rights. Precisely

because of that, as analyzed above, it is constitutionally permissible

for the principal shareholder to consider whether or not to use the

opportunity of a forced buy-out. Therefore, the Constitutional Court did

not find the principle of equality to be violated in this regard.

Reference to Art. 3 par. 1 of the Charter, under which the fundamental

rights and freedoms are guaranteed to all, without regard to property,

would be absurd in the present matter, in view of the nature of a

corporation, and the petitioner does not even attempt it. Nor can it be

concluded from Art. 26 of the International Covenant on Civil and

Political Rights, or from Art. 14 of the European Convention, that a

distinction in the position of shareholders, based on the criterion of

owning nine-tenths of shares, could be considered unreasonable or

non-objective, in view of the consequences described above. From the

point of view of applying the prohibition on discrimination, it is

important that the Commercial Code, in defining the principal

shareholder and minority shareholders, does not provide any exceptions.

The possibility of a forced buy-out conducted by the principal

shareholder can not be considered an unjustified advantage, because it

is based on rational and objective grounds (see above). Likewise, we can

not determine that comparable groups of minority shareholders are in an

unequal position in terms of the same possibility to apply their shares

in the same scope, as can be done under the same conditions (defined by

the statute) by a comparable group of other minority shareholders (cf.

judgment Pl. ÚS 38/01, Collection of Decisions of the Constitutional

Court of the CR, vol. 29, p. 355, no. 87/2003 Coll.). The effects of the

legal regulation of a forced buy-out are the same for all minority

shareholders. Similarly, in such a situation the obligation to make a

takeover bid if a certain threshold of ownership of a corporation’s

basic capital is reached can not be considered interference in property

rights. In that regard, however, the Constitutional Court emphasizes

that it would help balance out the legal regulation of the position of

minority shareholders if the legislature also regulated their right to

have the principal shareholder in that situation have not only the

right, but also the obligation, at their request, to buy their shares (a

“sell-out” or obligation to offer to buy shares).

 

63.

In the same way we must address the issue of preserving Art. 11 par. 1

of the Charter, under which each owner’s property rights have the same

content and enjoy the same protection. Here too we can not see

differences in the content of the rights of shareholders. Decision

making at a shareholder meeting, based on owning shares of a particular

nominal value, is fully in accordance with the nature of this kind of

entrepreneurial association under Art. 11 par. 1 and 3, Art. 20 par. 1

and Art. 26 par. 1 and 2 of the Charter. Insofar as the Commercial Code

provides different levels of minority protection in a corporation, based

on the importance of a decision being made (unanimity, nine tenths,

three fourths, two thirds, a simple majority – §183i par. 1, §186 of the

Com. Code) and ties this to the relationship between the shareholders

(§66a of the Com. Code), there can be no objections to this on

constitutional grounds.

 

64.

Observance of the rule in Art. 11 par. 1 of the Charter on equal

protection of property rights can be evaluated only by evaluating the

position of owners in the same situation. Therefore, statutory means of

protection from other areas (e.g. ownership of real estate) can not be

mechanically transferred to the protection of share ownership. Of

course, the petitioner argues only on the basis of comparing the legal

positions of the principal shareholder and minority shareholders, which,

however, is only one point of view for evaluation (point 64).

Evaluating the position of minority shareholders in similar situations

is equally important, but the petition lacks such arguments. Therefore,

in further evaluation of the petitioner’s individual objections, the

Constitutional Court, under Art. 11 par. 1 of the Charter, also took

into account the position of minority shareholders in proceedings to

wind up a corporation and transfer the business assets to the principal

shareholder (§220p of the Com. Code).

 

65.

Most of the petitioner’s objections are tied to the alleged inadequate

protection of the rights of minority shareholders during the preparation

of a forced buy-out, in particular in terms or protection from abuse by

the principal shareholder. The Constitutional Court must stress that

the petitioner’s claims are general, and would have a place in

proceedings on a constitutional complaint by a minority shareholder, if

they were supported by the facts of a particular case. Of course, in

proceedings on the abstract review of constitutionality, the

Constitutional Court acts in a different role. Under §68 par. 2 of the

Act on the Constitutional Court, in addition to issues of jurisdiction

and procedure, it evaluates primarily the content of a statute in terms

of its possible conflict with the constitutional order [Art. 87 par. 1

let. a) of the Constitution of the CR], not its possible implementation

by shareholders or application by the Czech National Bank and courts in

practice. Therefore, in evaluating these objections, we must emphasize

that the Constitutional Court does not consider it ruled out that

interference in the constitutionally guaranteed rights of shareholders,

as well as of the corporation itself, as a legal entity subject to

private law may occur or be occurring. However, that is not the subject

matter of this proceeding. A statute can be annulled only when the

bodies applying it are already using a different interpretation (e.g.,

judgment file no. Pl. ÚS 48/95, no. 121/1996 Coll.), whereby they

violate this constitutional obligation, and a constitutionally

consistent interpretation is not possible. The mere possibility of

another interpretation does not, in and of itself, establish that a

petition is or is not justified (cf. resolution Pl. ÚS 6/03, vol. 30, p.

579). Therefore, the Constitutional Court must respect the type of the

proceeding in which constitutionality is being reviewed (abstract

review, specific review at the request of a ordinary court under Art. 95

par. 2 of the Constitution of the CR, or accessorial evaluation under

§74 of the Act on the Constitutional Court, where the alleged

interference has already happened, and a court has made a decision with

legal effect).

 

66.

The petitioners arguments, despite the total length of the petition (58

pages and other extensive attachments), can be summarized in several

main points (point 63), the first of which is the objection of the

regulation and procedure in setting the consideration for shares in a

forced buy-out. As stated above, the issue of commercial register

proceedings has been separated and is addressed in the proceedings

conducted under file no. Pl. ÚS 43/05. The petitioner objects primarily

to the fact that the price is set on the basis of an expert appraisal

that is determined by the principal shareholder. Therefore, the

Constitutional Court first considered the question of the manner in

which the amount of consideration is defined. The constitutional

criterion is not Art. 11 par. 4 of the Charter. In this case, in view of

what was stated above about the nature of a corporation, the nature of

shares, and the nature of the right to a forced buy-out, we must start

with Art. 4 par. 4 of the Charter and take into account the essence and

significance of share ownership. As the Constitutional Court stated in

the already cited resolution file no. IV. ÚS 324/97, share ownership is

tied to a certain risk. Therefore, the constitutional imperative of

protecting property and possible compensation for lost property

naturally differs in the case of protecting property of real estate used

for housing, savings in a bank, or, as in this case, share ownership.

Therefore, a shareholder must accept that this is an investment which is

essentially tied to the right to conduct business (and only then with

the freedom of association), and thus also with business risk. It can

bring profit of several times the investment, but equally can completely

lose value, all at various times. Therefore, in a general legal

regulation it is extremely difficult to specify all possible criteria

for setting a share price. Therefore, in several places the Commercial

Code uses the term ‘adequate” price, which the petitioner criticizes

when it stresses that the basic attributes of compensation per share is

unclear, because the terms “adequate” and “fair consideration” are, in

its opinion, subjective. The Constitutional Court did not agree with

this opinion. The Commercial Code uses this term in connection with

share prices in several places (§156 par. 4, §183c par. 5, §183g par. 1,

§186a par. 4, and §190c par. 1). Both terms, on the contrary, respect

the possibilities of the statutory regulation. The legal regulation of a

forced buy-out speaks of an adequate price (§183k par. 1 and §183m par.

1 of the Com. Code) in connection with setting it. The provision of

§183j par. 2 of the Com. Code sets forth the obligation to present, in

the notice of a shareholder meeting, a statement by the board of

directors as to whether it considers the amount of consideration to be

fair. Regardless of justified doubts about the legislative manner of

expressing the opinion of the board of directors (see Štenglová, I.:

Obchodní zákoník. Komentář. [The Commercial Code. Commentary.] 11th ed.,

C. H. Beck, Prague 2006, p. 672) there is no doubt that the Commercial

Code assumes that the price set may differ from what the company’s

bodies expect. Proportionality means a requirement to take into account

all important circumstances in connection with the forced buy-out. That

means that, from the point of view of the law, it may not be set

subjectively. Only that could lead to a decision that the legal

regulation is unconstitutional. The fact that the Commercial Code takes

this term as a guide for objective appraisal follows from the fact that

it anticipates judicial review; a price not set on the basis of

objective criteria would not be subject to judicial review. Finally,

ruling out unconstitutional subjective criteria can also be concluded

from Act no. 36/1967 Coll., on Experts and Interpreters, in the form of

the requirement that an expert be impartial, have expert knowledge, and

not be used in the event of bias (§4, §6, §11). We can also point to the

case law of the Constitutional Court in questions of expert bias (e.g.,

judgment II. ÚS 35/03) which, in specific cases, defined strict

criteria for evaluation expert appraisals. The fact that the costs of an

expert appraisal are paid by the principal shareholders can not, in and

of itself, lead to the general conclusion that such appraisals are

therefore, defective, because the same objection could be raised if the

costs were paid by a minority shareholder. Although the petition in this

proceeding, as is also done in other countries (cf. resolution of the

2nd panel of the German Federal Court of 25 July 2005, file no. II ZR

27/03, also the statement in point 32), points to bad experiences with

some experts, that can not lead to a general conclusion that every

expert will thus act in conflict with the requirements of the Act on

Experts and Interpreters. The Constitutional Court is aware that in

practice violations of these rules can and do occur. However, that is

not a reason to declare unconstitutional a legal regulation that may be

interpreted and applied unconstitutionally. The Constitutional Court

would then have to annul on the same grounds, e.g., the institution of

detention, expropriation, dissolution of a political party, etc.. It is

precisely because violation of a constitutionally consistent legal

regulation can happen in practice that the right to judicial protection

is guaranteed. Whether a price is adequate is a matter for expert and

impartial evaluation. Because the opinions of the buyer and seller may

differ, a procedure is provided for review of that price by an

independent and impartial body, the Czech National Bank, which, of

course, in view of its nature, would not be sufficient. Therefore, under

Art. 4 and Art. 81 of the Constitution of the CR, additional protection

is guaranteed in the form of a court decision. Finally, we must note

that other countries do not differ from this process. For example, the

most recent Austrian regulation (see §1 Bundesgesetz über den Ausschluss

von Minderheitsgesellschaftern [Federal Act on Squeeze-Out of Minority

Shareholders], BGBl. I., no. 75/2006) speaks of “Gewährung einer

angemessenen Barabfindung,” i.e. provision of an appropriate severance

payment in cash, without providing anything further (likewise, §327a

par. 1 of the German Shares Act, although it provides certain criteria

in other provisions). The attempt to find another way of setting this

price in Germany, based on an irrefutable presumption of adequacy if it

is accepted by at least 90% of the bought-out shareholders, failed (see

Stumpf, Ch.: Grundrechtsschutz im Aktienrecht. Neue Juristische

Wochenschrift [Protection of Fundamental Rights in Share Law. New Legal

Weekly], vol. 2003, no. 1, p. 9). Therefore, on this point the

Constitutional Court did not find the Commercial Code to be

unconstitutional. It is a question of practice, what criteria will

develop here. In this regard the position of the former Securities

Commission is significant (point 27). Likewise, the term “fair market

value,” used in the USA, is criticized for its multiple possible

meanings and ways of determining it (see Fischel, D. R.: The Appraisal

Remedy in Corporate Law. American Bar Foundation Research Journal, vol.

1983, pp. 885-898). Therefore, in practice the courts look for a number

of “tests” (see sub 61), which also change over time. In the USA, the

laws of the state of Delaware are considered key in the area of

corporate law. Delaware’s Supreme Court, in a precedential decision,

states that, regardless of the number of possible tests, it will accept

generally accepted techniques used in the financial community and the

courts – Weinberger v. UOP, Inc., 457 A.2d 701 (Del) 1983, available.

e.g., at www.nyls.edu/pdfs/WeinbergervUOP.pdf, where the court also

considered the purpose of a merger].

 

67.

A share, as an expression of a proportion of a certain property value,

is the subject of property rights. Of course, it is difficult to compare

protection of that form of property with protection of real estate

(expropriation), on which the dogma of Art. 11 par. 4 of the Charter is

based. The market situation and relationships in a particular

corporation have a fundamental influence on its value (e.g., so-called

starving out of small shareholders by not paying dividends, loss of

value as a result of non-marketability, prosperity at a particular

period of time, etc.). The fact that this does not involve

expropriation, with a prerequisite of demonstrating public interest, as

the petitioner claims, means that the public interest is not taken into

account when setting the amount of consideration. This was already

decided by the legislature in a generally binding manner. We must add

that in cases of expropriation in the public interest, by the nature of

the matter there is a certain sacrifice required for the benefit of the

whole; in the case of a forced buy-out, in view of the foregoing, the

Constitutional Court does not find such grounds to exist. Instead, there

is economic deliberation by the purchasing principal shareholder, as to

whether the transaction is worthwhile. However, taking into account the

purely economic dimension of this issue, reduced to investment, that

also means that, for example, in contrast with the expropriation of a

family house, the principal shareholder will not consider emotional

aspects, or social ties and consequences, although such aspects are not

indirectly ruled out (a pension fund as a minority shareholder,

defenders of the environment in a corporation that is a threat to the

environment). The relationship to a share in business assets defies

evades such appraisal. It involves an uncertain investment, which is

supposed to bring profits, but in view of the nature of a corporation,

it is an investment that does not necessarily guarantee profit.

 

68.

What is an adequate price can be determined by an expert procedure,

independent of the parties, under the supervision of the Czech National

Bank, with a possibility of judicial review. In view of the

circumstances of a buy-out, connected to interference in property

rights, the adequacy of a price for listed shares can never go below the

threshold of the market price. From that point of view the term

“different amount of consideration” in §183k par. 1 of the Com. Code

must be understood only as a threshold below which one may not go in

judicial review. In other words, the court may not lower the amount of

consideration contested by a minority shareholder. This also applies to

the actions of the Czech National Bank under §183i par. 5 of the Com.

Code. In terms of Art. 11 par. 1 of the Charter any other interpretation

would be disadvantaging the minority shareholder (reformatio in peius).

Therefore, §183j par. 4 of the Com. Code, under which the proposal for a

shareholder meeting resolution may not deviate, when setting the amount

of consideration from documentation under §183j par. 6 of the Com.

Code, must be interpreted in this constitutionally consistent manner.

Otherwise, it would have to be annulled for being unconstitutional. In

terms of the proportionality of interference, the expert appraisal does

not serve to protect the principal shareholder, and the principal

shareholder can not turn to a court to question it; that is possible

only for minority shareholders. If the principal shareholder offers

more, that is its business decision. As was already emphasized (point

59), the principal shareholder does not need to justify its decision,

because it is based on the assumption that the investment into buying

out the remaining shares will be worth it, despite the increased costs.

This is not because it acquires them for a better price, but also

because, in view of the circumstances, it can also pay a higher price,

which the board of directors, in view of the company’s overall

situation, could have doubts (§183j par. 2 of the Com. Code). The law

certainly can not exhaustively specify the criteria for evaluating

adequacy (proportionality). That is a matter for expert appraisal using

financial and economic instruments approved by the Czech National Bank

(see opinion of the former Securities Commission no. STAN/13/2005 of 9

November 2005 on the issue of adequacy (proportionality) and documents

demonstrating adequacy ( proportionality). We note that this Opinion was

not subject to proceedings before the Constitutional Court, just like

the practices of the Czech National Bank based on it.

 

69.

The law prescribes a procedure for setting an adequate price, which the

petitioner also objects to. Under §183m par. 1 of the Com. Code,

entitled persons have a right to consideration in cash, the amount of

which is determined by the principal shareholder; the principal

shareholder shall document the adequacy of the consideration with an

expert appraisal, which may not be older than 3 months as of the day the

application is delivered under §183i par. 1 of the Com. Code, and the

amount is reviewed by the Czech National Bank. The principal shareholder

selects the expert and pays the costs (§183j par. 6 of the Com. Code).

In this regard we must emphasize that impartial, expert determination of

an adequate price must be considered part of the protection of the

minority shareholder’s property rights (point 67). Therefore, his

position must be comparable to that of other owners in a similar

situation, as indicated by Art. 11 par. 1 of the Charter (the right to

equal protection).

 

70.

In such a case, it is the role of the Constitutional Court to evaluate

whether this process provides protection at all (point 68 a 69), and

whether the level of that protection is comparable to the protection of

other owners in a similar situation. As a measure, the Constitutional

Court could use the process for winding up a corporation and

transferring the business assets to the principal shareholder, because

the prerequisites for the transfer are the same as in the case of a

forced buy-out. In that case, however, §220p par. 2 of the Com. Code

provides that the principal shareholder is obligated to provide other

shareholders an adequate settlement in cash, the amount of which must be

documented by an expert appraisal. It points to the analogous

application of §59 par. 3 and 4 of the Com. Code. Under that provision,

the amount of adequate settlement is set according to an appraisal

prepared by an expert “independent of the company, appointed for that

purpose by a court.” Therefore, the Constitutional Court had to weigh

whether the difference in appointing an expert is not so discriminatory

in the case of a forced buy-out that it violates the right to equal

protection under Art. 11 par. 1 of the Charter.

 

71.

The Constitutional Court concluded that this obligation of the

principal shareholder can make the position of minority shareholders

more difficult, but not in such a manner as to make the regulation

unconstitutional. We have already referred to the position of an expert

in preparing an expert appraisal, and the need for impartiality. Of

course, that alone would be absolutely insufficient, if it were not

accompanied by the obligatory supervision of the Czech National Bank

under §183i par. 5, in connection with the appropriate application of

§183e of the Com. Code. This process applies to corporations with listed

and unlisted securities, otherwise the rule of equal protection under

Art. 11 par. 1 of the Charter would be violated. Even though, in the

case of the Czech National Bank, in view of its position, the required

distance from the shareholders is presumed, it is nevertheless not a

body that meets the requirements of Art. 4 of the Constitution of the CR

and Art. 36 of the Charter. Because this involves protection of a

fundamental right, including the Czech National Bank in the process of a

forced buy-out is not sufficient from a constitutional viewpoint.

However, because §183k of the Com. Code regulates the process from the

point of view of judicial protection of minority shareholders, the

Constitutional Court concluded that although the selection of the expert

by the principal shareholder is a problem, it is compensated for by

other measures on the part of the state. Nonetheless, there is no doubt

that a different process must be considered, for the reason that the

role of a legal regulation should be to eliminate, to the maximum extent

possible, the possibility that court disputes will arise, and this

regulation will often lead to such disputes. However, we must stress,

that in Germany, to whose regulation the petitioner refers, in practice

the situation is that an expert is appointed by the regional court

according to the company’s registered address, as a rule at the proposal

of the principal shareholder, and case law has not criticized that

process (cf. fundamental decision of the German Federal Court of 18

September 2006, file no. II ZR 225/04, especially points 14 to 17),

although it is an objection frequently raised in complaints.

 

72.

The petitioner also criticizes the regulation of the forced buy-out

because only the principal shareholder is a party to proceedings on the

prior consent of the Czech National Bank under §183i par. 5 of the Com.

Code. In view of the Czech National Bank’s distance from the

shareholders, and the nature of the proceedings, where it is not

reasonably possible to arrange the participation often thousands of

minority shareholders, some of whom are “anonymous” (see Kotásek, J.:

Vytěsnění anonymního akcionáře. [Squeeze-out of Anonymous Shareholders]

Časopis pro právní vědu a praxi [Journal for Legal Theory and Practice],

vol. 2006, no. 3, p. 258-259), that can hardly be considered

unconstitutional in and of itself, when the Czech National Bank does not

directly rule on a forced-buy in administrative proceedings (only in

that case would this be analogous to expropriation proceedings). That is

in the jurisdiction of the shareholder meeting. The actions of the

Czech National Bank, in the position of an administrative body in

proceedings under §183i par. 5 of the Com. Code, can result in state

liability for damages under Act no. 82/1998 Coll. Likewise, the

petitioner’s objection criticizing the fiction of a positive opinion by

the Czech National Bank will not stand in terms of the constitutional

order. This measure against the inactivity of an administrative body is

not unusual. It does not rule out the possibility for minority

shareholders to turn to a court, because the amount of consideration is

always subject to judicial review, regardless of whether or not the

state met its obligations regarding supervision of the preparation of a

forced buy-out through the Czech National Bank. In addition, the

petitioner did not even contest this provision (§183e par. 9 of the Com.

Code) in the statement of claim in the petition.

 

73.

It was then necessary to evaluate the remaining objections, concerning

the setting of adequate compensation. Here the petitioner primarily

alleges insufficient guarantees of payment of the consideration for the

bought-out shares (point 20), as, in its opinion, even the additions of

§183i par. 6 of the Com. Code to the regulation does not eliminate the

fully justified requirement that payment of the amount of consideration

set by the principal shareholder be sufficiently ensured. The

Constitutional Court did not agree with this objection. Although the

obligatory deposit of funds to meet contractual obligations is not

constitutionally required anywhere, nor is it completely routine in

statutory regulation, in this case we must begin with the fact that this

does not involve a contractually established legal relationship, but

the ownership of shares passes by law. Therefore, this obligation too

forces the principal shareholder to consider whether to use a forced

buy-out, because it understandably means increased expenses for the

services of a bank or a securities broker. Therefore, from a

constitutional viewpoint, this regulation must be considered adequate,

regardless of liability for not complying with it, including possible

criminal liability. We must also point out that depositing funds under

§183i par. 6 of the Com. Code comes only after confirmation of calling a

shareholder meeting by the Czech National Bank under §183i par. 5 of

the Com. Code. Therefore, the funds are secured after a possible

increase in the consideration, by a process under §183e par. 8 of the

Com. Code. The legislature can change this regulation, if the kind of

situation that the petitioner hypothetically construes were ever to

occur.

 

74.

Finally, we must mention the objection of lack of penalty, whereby, in

the petitioner’s opinion, the legal regulation does not motivate the

principal shareholder to behave honestly, because it is not in any way

penalized for conduct in conflict with good morals (point 12). Its only

risk is that it might have to pay additional amounts to some

shareholders who have sufficient funds to bring a lawsuit for review of

consideration before a formalistically thinking judge. The requirement

of legality and that of proportionality is not respected in the transfer

of shares, in the proceedings to review the legality of measures

leading to the transfer, or in setting and reviewing the amount of

consideration. The Constitutional Court could not agree with this

objection either, because it does not see any reason why it would be

necessary to specify additional special means of liability for violation

of obligations by the principal shareholder. In terms of the

constitutional order, the essential thing is that such means are

provided at all.

 

If

the principal shareholder uses the opportunity for a forced share

buy-out that the law provides for the abovementioned reasons, it behaves

permissibly and does not abuse the right. The rules prohibiting abuse

of position by a shareholder under §56a of the Com. Code, with the

ability to proceed under §131 of the Com. Code (invalidity of

shareholder meeting resolution), also naturally apply to a forced share

buy-out. Of course, the statutorily permitted buy-out of shares upon

reaching the specified percentage of ownership of a company’s

securities, in and of itself, can not be abuse of position. One can not

say that such situations do not occur in the business environment in the

Czech Republic, and that, compared to developed economies, the use of

means of judicial protection is completely sufficient. It is only the

use of means of judicial protection that provides, in these countries, a

true picture of corporate law, which can not be understood at all

without case law [Conard, A. F.: The Law of Corporations. Michigan Law

Review, vol. 1973, no. 4, p. 648, states that without case law corporate

law would be a sad rag]. Likewise, we can not deny that the legislature

must seek other means (among the newest research, see, e.g., overview

of liability after winding up a company in the study by Miller, S. K.,

Greenberg, P. S., Greenberg, R. H.: An Empirical Glimpse into Limited

Liability Companies: Assessing the Need to Protect Minority Investors.

American Business Law Journal, vol. 43/2006, no. 4, p. 609n., overview

of solutions pp. 639-646), nonetheless only the effective use of

judicial protection can have a preventive effect on attempts to abuse

position in a corporation. This is not a very frequent event, not only

here, but also in other countries, where the review of abuse also still

exists more as a theory than a practice. This is also related to the

fact that the law itself permits a forced buy-out, and such a

transaction does not need to be materially justified (regarding Germany,

e.g., Kort, M.: Squeeze-out-Beschlüsse: Kein Erfordernis sachlicher

Rechtfertigung und bloβ eingeschränkte Rechtsmissbrachuskontrolle.

Zeitschrift für Wirtschaftsrecht, vol. 2006, no. 33, esp. p. 1520n.;

regarding Austria, Althuber, F., Krüger, A.: Squeeze-out in Österreich.

Aktiengesellschaft: Zeitschrift für das Gesamte Aktienwesen, vol. 2007,

no. 6, p. 197n.). Therefore, as regards the objection of abuse of

position, the Constitutional Court must state that in such a situation

the motives of the principal shareholder basically do not matter,

because even the attempt to obtain the required 90% would have to be

considered abuse. Even in the USA, regardless of the possibility of

suing for compensation of damages, such proceedings are not very

successful, in view of the expenses for expert analyses, experts, and,

especially, legal representation (Seligman, J.: Reappraising the

Appraisal Remedy. George Washington Law Review, vol. 52/1984, p.

860-864).

 

75.

In this regard, the petition also pointed to the lack of regulation of

another aspect of setting the amount of consideration and possible abuse

of a forced buy-out, i.e. the lack of a specified interest rate for

late payment of consideration under §183m of the Com. Code. It can not

be concluded that this obligation has to be expressly stated for every

case, simply in view of the fact that this is still a private law

relationship. In contrast, it would be necessary if the law wanted to

rule out application of the legal regulation of commercially binding

relationships for relationships arising between shareholders [e.g., §369

of the Com. Code, or §340 par. 2 of the Com. Code, together with §261

par. 3 let. a) of the Com. Code]. Therefore, in the event of late

payment, overdue interest is applied (as the value of money to which

there is an entitlement by law) under §1 of government Directive no.

142/1994 Coll., which provides the amount of overdue interest and

overdue fees under the Civil Code, as amended by Directive no. 163/2005

Coll. This can also be seen as a penalty on the principal shareholder,

as overdue interest is, in private law, considered a form of liquidated

damages (cf. Knappová, M., Švestka, J. a kol.: Občanské právo hmotné.

[Substantive Civil Law] part 3. 3rd ed. Prague 2002, pp. 74, 125, 131).

 

76.

As regards objections of insufficient judicial protection, one must

realize that differences between individual countries, in view of the

regulation of other aspects of a forced buy-out, lead to differently

established rights to judicial protection. The process itself of

deciding to conduct a forced buy-out is limited by the abovementioned

lessons from practice (point 79 and 80) as regards protection from

potential abuse. Setting a 90% threshold rules out doubts in that

regard, so limiting judicial review to other issues is acceptable. This

is proved by experience in states where these matters can be questioned

in court. In Great Britain there used to be considerable numbers of

court cases that were completely unsuccessful (the now classic work,

Davies, P. L.: Gower and Davies’ Principles of Modern Company Law. 7th

ed., London 2003, p. 746, cites only three examples where a 90%

shareholder abused rather than used the right). Therefore, the number of

lawsuits gradually declined, despite the fact that Art. 430 of the

Companies Act 1985 supported the filing of such lawsuits, because it was

to be a proceeding in which minority shareholders were not required to

pay fees, unless the complaint was unnecessary, impermissible, or

vexatious. Essentially the same regulation was used in the new British

Companies Act 2006, in Art. 983. Similarly, the key decision in the USA,

Weinberger v. UOP, Inc. (see point 66) states that if, in the case of

an entire fairness (the entire fairness test includes review of fair

treatment and a fair price), fraudulent conduct is not found,

essentially only the question of fair price remains for the court to

decide. The continent legal system provides most of the requirements

derived by case law in the USA as general requirements directly in the

law. The petitioner’s objections relating to judicial protection of

minority shareholders concerning the lack of opportunity for preliminary

review of the legality of the process in exercising the buy-out right

must be evaluated from this point of view. We note that the question of

constitutionality of registration in the commercial register (§200da

par. 3 of the CPC) was separated out into a separate proceeding

conducted under file no. Pl. ÚS 43/05.

 

77.

Among the defects of the review proceeding under §183k of the Com.

Code, the petitioner includes the unclear definition of the circle of

parties, the kind of proceeding, the complaint, and the expiration of

the right to appeal the lack of adequate consideration (for detail, see

point 19). Regarding the first three objections, the Constitutional

Court states that they involve interpretation or ordinary law. It is up

to the courts to resolve imagined or actual unclear points. Insofar as

the petitioner points to the different positions of the two high courts

in terms of the nature of the proceedings, and thus the status of

parties, it is up to the Supreme Court, as part of its role in unifying

case law, to settle such issues. The Constitutional Court can not

fulfill that role. It could do so in exceptional circumstances, if the

Supreme Court ceased to fulfill the role (cf. actions of the

Constitutional Court at the time when the Supreme Administrative Court

did not exist, in relation to the case law of regional courts in matters

of the administrative judiciary). The Constitutional Court can consider

this issue if the petitioner claims that one of the possible

interpretations is unconstitutional. However, if it only alleges that

there are two possible interpretations, without considering either of

them unconstitutional, there is no opportunity for the Constitutional

Court to intervene. It is the obligation of the ordinary court to

protect the fundamental rights under Art. 4 of the Constitution of the

CR by choosing a constitutionally consistent interpretation, and, in

cases of doubt, to turn to the Constitutional Court. The same applies to

the petitioner’s allegations that the provision on a forced buy-out are

inconsistent with other provisions of the Commercial Code.

 

78.

The petitioner also alleges failure to respect the principles of equal

weapons, protection of the weaker party, and access to the courts. It

states that even if a minority shareholder’s complaint were justified,

the original state of affairs may not be restored, as there is a certain

fait accompli, created by the registration in the commercial register.

The court that will rule in the matter will have that existing situation

as its starting point, and, in view of the principle of legal certainty

and protection of the rights of third parties, will be inclined to deny

a petition to review the shareholder meeting resolution. Therefore, the

review should take place before the transfer of ownership, as in a

number of other states. In the Czech Republic such review is ruled out

under §131 par. 3 of the Com. Code, because, using §131 of the Com.

Code, a reason for stopping proceedings or denying the complaint is

always sought.

 

In

this regard, of course, the petitioner does not specify where exactly

§131 par. 3 of the Com. Code is unconstitutional, nor does it actually

propose annulling it. The provisions themselves, §131 par. 1 and 2 of

the Com. Code, do not rule out annulling a shareholder meeting

resolution on the transfer of securities to the principal shareholder.

Likewise, the petitioner overlooks the procedure under §131 par. 4 of

the Com. Code, which a minority shareholder can apply regardless of the

application of §131 par. 3 of the Com. Code. In any case, however, that

procedure can not cast doubt on the institution of the share buy-out

itself, which is established directly by the law, nor on the

non-participation of the minority shareholder in commercial register

registration proceedings. The Constitutional Court believes that the

legal regulation, thus construed, i.e. the inability of a shareholder to

take part in the commercial register proceedings, with reference to the

other opportunities cited to exercise his rights in different

independent proceedings, has a constitutionally acceptable

justification, in terms of the proportionality of competing property

rights and other derived rights of the principal shareholder and of

minority shareholders, as well as their differing interests, arising

from the nature of the matter, as has already been stated several times

(the first time in decision file no. IV. ÚS 324/97, Collection of

Decisions of the Constitutional Court ČR, vol. no. 10, p. 365, and in

file no. IV. ÚS 720/01). The inability to invalidate a shareholder

meeting resolution on the grounds of inadequate consideration (§183k

par. 4 and 5 of the Com. Code) can be considered a measure that does not

conflict with the structure of the buy-out right, and is rational,

because it prevents this method beign used in fact to introduce judicial

review of the institution of the buy-out itself, if every time the

principal shareholder failed in the proceeding (e.g., CZK 1,000 Kč per

share instead of CZK 990) it meant that the shareholder meeting would be

declared invalid, with consequences for preserving the rights of third

parties and legal certainty (cf. §131 par. 3 of the Com. Code).

 

79.

According to the petitioner, in proceedings to review the amount of

consideration the principle of protecting the weaker party is not

observed, because in that review, under §183k of the Com. Code the

minority shareholder gets to have his say only when he already has

against him obstacles such as the expert appraisal, position statement

from the Czech National bank, and registration in the commercial

register, without having had an opportunity to be involved or be a party

to the proceeding. These objections can not by themselves be considered

to violate the equality of parties to a proceeding under Art. 37 par. 3

of the Charter, nor does the petitioner claim such violation. These

“obstacles” are merely the prerequisites for conducting a forced

buy-out. They can equally serve to protect the interests of minority

shareholders. The Constitutional Court only points out, in the spirit of

the foregoing analysis of the nature of a forced share buy-out, that

the equality of parties to proceedings before a court lies in their

equal procedural rights, not in their position in a corporation. This is

derived from their proportion of the shares of the same nominal value,

and guarantees of procedural equality in court proceedings can not

change anything about that. This also applies to another alleged

violation – as the petitioner calls it – of the principle of equal

weapons, in the form of a considerable information deficit on the part

of minority shareholders concerning the condition of the company’s

assets and likely future business results, as most of the evaluations

are based on documentation supplied by the company’s board of directors.

This claim can not stand in the context of an abstract review of the

constitutionality of a statute. These are specific conditions for the

conduct of a trial, and the violation of procedural principles would

have to be proved as part of evaluation of a particular case (e.g., as

part of proceedings on a constitutional complain).

 

80.

The petitioner considers another defect in judicial protection to be

the principle that in review proceedings the court is guided only by the

complaint of the plaintiff, which has little information enabling it to

calculate the correct amount of consideration in a short period of

time. It insists that the court is not forced to do this in, e.g.,

Germany. Moreover, there is the danger of paying court fees for

whichever party loses the dispute. The court fee will become higher as

the disputed amount of consideration increases. The Constitutional Court

states that foreign legal regulations may well be friendlier to

minority shareholders, but that does not automatically mean that the

domestic legal regulation is inconsistent with the constitutional order.

Merely arguing on the basis of a foreign legal regulation is not

sufficient; moreover, it would require a far more detailed analysis than

a mere reference without further arguments (see further, in particular,

the commentary to §4 and §15 in: Münchener Kommentar zum Aktiengesetz

[Munich Commentary on the Shares Act]. 2nd ed., vol. 9/1, §327 a –

§327f. AktG. WpĂśG SpruchG. Munich, 2004). Undoubtedly it can be made

use of in further amendments to the institution under review. However,

in terms of judicial protection under Art. 4 of the Constitution of the

CR and Art. 36 par. 1 of the Charter, the important thing in this regard

is that judicial protection is guaranteed, not whether it is provided

preventively or not. The state has a certain amount of room for

discretion as to whether the opportunity to file a complaint will be

available in advance of the shareholder meeting itself. It is likewise

entitled to decide on the conditions under which protection will be

provided; however, it must set the conditions so as not to render its

use impossible. One must realize that shifting judicial review to the

final phase also means a considerable danger for the principal

shareholder, who may, as a result of an unfavorable decision, suffer far

greater losses than in the event of a decision in the early phase of a

buy-out. The court fees that the petitioner mentions also can not be

considered an obstacle, even though there are states where they are not

required from the minority shareholder under certain conditions (Art.

983 Companies Act 2006, previously Art. 430 Companies Act 1985 and, on

that same model, §15 par. 2 Gesetz über das gesellschaftsrechtliche

Spruchverfahren. [Act on Company Law Administrative Actions] BGBl, vol.

2003, vol. I., part 25, p. 838). it is up to the legislature whether to

consider that possibility, taking into account the fact that court fees

play a certain regulatory role in connection with the growth of lawsuits

and taking into account the structure of minority shareholders in the

Czech Republic. In addition, the claim that this regulation motivates

the principal shareholder to set the amount of consideration as low as

possible will not stand even at a general level. The lower that price is

set (in view of the expert appraisal and the opinion of the Czech

National Bank that can not be assumed), the greater the danger it faces

of losing in court proceedings, including paying court fees and

compensation of damages.

 

81.

We also can not agree with the allegation of insufficient protection of

the rights of minority shareholders who did not turn to the court. The

state can not be criticized for not providing protection to someone who

did not turn to it with a request for protection. The Constitutional

Court believes that an emancipated individual living in a free,

democratic society, should be spared excessive protectionist

intervention on the part of the state, and a sign of his maturity is

precisely the capacity to guard one’s rights in the spirit of the

principle vigilantibus iura scripta sunt, of course, on the presumption

that the state provides the requisite means of protection. Therefore,

this approach was not found to be unconstitutional in principle. A

forced buy-out is a right of the principal shareholder, which does not

need to provide justification for its business aims. It is up to its

judgment whether to conduct the buy-out (point 57). However, it must

expect that it will buy out the shares of all minority shareholders at a

price that will be set in an objective, expert, and impartial manner,

not only the shares of those who will challenge the amount of

consideration in court. Likewise, it must be assumed that a court can

rule on the amount of consideration the same way for each individual

minority shareholder filing a complaint. If our legal regulation did not

assume that, the structure of the economic basis of the buy-out would

be cast in doubt as a form of exercising the fundamental right of an

owner and entrepreneur. Likewise, §183k par. 3 of the Com. Code, which

the petitioner also alleges to be incomprehensible must be interpreted

the same way, because otherwise such shareholders would not be provided

protection of their property rights. Likewise, the missing mechanism for

publicizing a court decision under §183k par. 3 of the Com. Code can

not be considered interference in the shareholder’s property rights

under Art. 11 par. 3 of the Charter, or the right to judicial protection

under Art. 38 par. 2 of the Charter. It is up to the minority

shareholder to guard his rights, as he is also informed about possible

interference in them in the Commercial Bulletin under government

Directive no. 503/2000 Coll., on the Commercial Bulletin, as amended by

later regulations.

 

82.

The petitioner presents a number of other objections that consist of,

e.g., lack of clarity concerning the deadline for calling a shareholder

meeting, insufficient time to prepare for a shareholder meeting, a

missing reference to §181 of the Com. Code. (see point 16), etc.

According to the petitioner, some important experts have completely

opposite opinions. In its opinion, the legal regulation is, in this

regard, unclear, uncertain, and deceptive, and does not meet the

requirements imposed on a law-based state in Art. 1 of the Constitution

of the CR. Here, too, what was said above regarding the role of the

Constitutional Court in interpreting ordinary law applies. The

petitioner also did not explain how the unclear points that it cites can

be a violation of Art. 4 par. 4 of the Charter, as it claims. In terms

of the essence and significance of the position of a shareholder in the

constitutional order, it was already explained above that this involves a

conflict of several fundamental rights and freedoms. In terms of

proportionality, in this case priority is given to the principal

shareholder’s property rights and right to do business (Art. 11 par. 1

and Art. 26 par. 1 and 2 of the Charter) over the right to be a

shareholder in a corporation where 90% is held by the principal

shareholder, with the provision that the essence and significance of the

minority shareholder’s position as an investor are preserved. In this

regard, adequate consideration, in view of the grounds for a forced

buy-out, preserves the value of shares as a special kind of uncertain

investment. From this point of view, Art. 4 par. 4 of the Charter also

can not be considered to have been violated; we must also point out that

Art. 26 par. 1 and 2 of the Charter are applied under the regime of

Art. 41 par. 1 of the Charter.

 

83.

The same applies to judicial protection, where its essence and

significance are also preserved, although there is no doubt that the

legislature could have been more sympathetic to minority owners.

However, the state fulfills its protective role in this manner, and

under the case law of the European Court of Human Rights (cf. the

decision in the matter Sovtransavto Holding v. Ukraine of 25 July 2002,

no. 48553/99, §96), one can not claim that it did not meet its

obligation to protect the human rights and freedoms of individuals in

its jurisdiction. This undertaking can also mean a positive obligation

that includes the necessary measure to protect property rights, even in

cases concerning disputes between individuals and companies (with

reference to the decisions Airey v. Ireland, of 9 October 1979, Series A

no. 32, §25 and López Ostra v. Spain, of 9 December 1994, Series A no.

303-C, §55). According to the European Court of Human Rights that means

that the state is required to establish court proceedings providing

sufficient procedural guarantees and thus permit the domestic courts to

effectively and fairly adjudicate disputes between private parties. The

other rights of minority shareholders are tied to the conduct of the

shareholder meeting (in particular, §180, §182 and §183 of the Com.

Code), at which the transfer of business assets to the principal

shareholder is to be decided. The requirement of correct procedure by

the principal shareholder is also strengthened by the obligation to have

a notarial record made of the shareholder meeting’s decision on the

transfer of securities to the principal shareholder (§183i par. 2 and 3

of the Com. Code), to which the expert appraisal and other information

must be attached. In terms of constitutionality of the regulation,

provision of information is adequately ensured, in view of the fact that

shareholders have the right to view and make copies not only of the

board of directors’ report, but also of the expert appraisal. Thus, we

can state that the Commercial Code imposes a number of obligation on the

corporation and the principal shareholder to ensure that minority

shareholders are appropriately informed, and at the same time permits

the option of subsequent filing of a complaint to declare the

shareholder meeting invalid, as a means available to minority

shareholders to start the process of judicial review of the fairness and

honesty of the actions of the principal shareholder. Likewise, it

protects the rights of lien creditors (objection point 10c), even though

not in terms of the process under §183k par. 3 of the Com. Code.

However, the legal regulation of the buy-out can not be criticized on

constitutional grounds for that, because it does not concern

shareholders who could take part in a shareholder meeting and exercise

the right of a deciding vote. It primarily concerns a relationship

governed by the Civil Code.

 

84.

In conclusion, we must state that the legal regulation of a forced

buy-out of securities is not, and not only in terms of the process of

introducing it into the Commercial Code and amending it, an example of a

legal regulation that does not raise a number of questions of a

constitutional nature. These objections can be overcome through a

constitutional interpretation. However, that does not mean that

interference in the constitutionally guaranteed rights of minority

shareholders under Art. 4 par. 4, Art. 11 par. 1, Art. 20 par. 1, Art.

26 par. 1 and 2, Art. 36 par. 1, Art. 37 par. 3 and Art. 38 par. 2 of

the Charter can not occur in particular cases. In this case, however,

the Constitutional Court did not evaluate a particular situation in a

forced buy-out of securities in a particular corporation, but whether

the constitutional requirements for passing a statute were met, and its

consistency with the constitutional order. Therefore, in a review of the

individual components of a forced buy-out it is the role not only of

the Constitutional Court, but in the first instance of the ordinary

courts (under Art. 4 of the Constitution of the CR), to protect the

fundamental rights of plaintiffs.

 

85.

As regards the request for the Constitutional Court to give priority to

reviewing the petition, in view of the denial of the petition

containing that request, reviewing it has become moot.

 

Instruction: Decisions of the Constitutional Court can not be appealed.

 

Brno, 27 March 2008