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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