The European Court of Justice has recently ruled on the extent of the rights that minority shareholders enjoy in a company in case of a takeover.
The case revolved around a decision taken by Bertelsmann, Europe’s biggest media company, to increase its stake in RTL Group to more than 89 per cent. This led to a row between Bertelsmann and some institutional investors, the latter pressing for the cancellation of the agreement reached between GBL (the larger shareholder) and Bertelsmann, by virtue of which agreement GBL gave up its share of 30 per cent in the capital of RTL Group to Bertelsmann in exchange for 25 per cent of Bertelsmann’s capital.
The minority shareholders in RTL, led by Audiolux SA, claimed that they should get the same terms as GBL, their larger counterpart, when they transferred their shares to Bertelsmann. Bertelsmann, however, insisted that it was not required to extend the terms of its deal with GBL to other shareholders. As a result, the minority shareholders of RTL were not able to sell their shares on the same terms as GBL.
Since they were refused the same terms, the minority shareholders disputed the arrangement in court. In support of their claim, Audiolux relied on Directive 77/91EC which recognises equal treatment of shareholders in matters relating to increases or reductions of capital. They also relied on Directive 2001/34 which upholds the principle of equality of treatment in relation to the provision of information to shareholders.
The national court, however, rejected their action, holding that national legislation does not recognise a specific law obliging Bertelsmann to offer to buy their shares on the same terms agreed with GBL. The shareholders appealed to Luxembourg’s Court of Cassation, arguing that the agreement violates a principle of equality of shareholders, and sought to have the parties to the dispute declared jointly liable for the injury suffered.
The Court of Cassation referred the matter to the European Court of Justice for a preliminary ruling, requesting guidance on the existence of a general principle of equality of treatment of shareholders. The European Court held that Audiolux’s request was aimed at establishing an obligation on the shareholder acquiring or strenghening its controlling share in RTL. It concluded that Bertelsmann was not obliged to offer minority shareholders in RTL the same conditions.
Such an obligation would force Bertelsmann to contract with all minority shareholders on the same terms as those agreed for the acquisition of a share giving it the controlling interest in a company.
The European Court held that no such principle exists in community legislation nor in company law. Hence, the equal treatment of shareholders has no constitutional status either in community law or in the national legal orders. In order for the court to uphold a “general principle”, such a principle must be manifestly of general application and of constitutional reach.
This decision has not been well received by certain associations that defend shareholders’ interests. They have argued that minority shareholders have been dealt a hard blow and are now lobbying in order to secure legislation offering better recognition of the rights of minority shareholders at community level.
Dr Grech is an associate with Guido de Marco & Associates and heads its European law divison.