Highlights:

• Under Danish law, a majority shareholder owning at least 70% of the shares in a distressed bank is entitled to acquire the remaining shares by way of compulsory redemption subject to certain conditions.
• In a recent case the Danish Supreme Court has decided that treasury shares must be included when calculating the total number of shares issued by the company thus increasing the shareholding required for a compulsory redemption and making it more difficult for a majority shareholder to carry out the compulsory redemption.
• The case shows how the Danish courts are reluctant to impose restrictions on the rights of minority shareholders.

Introduction

This article presents a recent landmark court case decided by the Danish Supreme Court regarding the interpretation of the Danish provisions on compulsory redemption of shares issued by a bank in distress. The article presents the implications of the decision by the Danish Supreme Court with respect to the possibilities of carrying out such compulsory redemptions. Further, the article examines the implications of the decisions on compulsory redemptions outside of the scope of the Danish financial legislation.

Executive Summary

Under section 144 of the Danish Financial Services Act, a majority shareholder owning at least 70% of the shares in a distressed bank is entitled to acquire the remaining shares by way of compulsory redemption subject to certain conditions.

In a case brought before the Danish Supreme Court, a majority shareholder owned more than 70% of the shares when excluding treasury shares from the total number of shares issued by the company. However, if including the treasury shares, said ownership amounted to less than 70%.

The wording of the provision did not state whether to include treasury shares or not. However, since treasury shares can be cancelled pursuant to a shareholders resolution, it was generally assumed prior to the court case, that treasury shares should not be included in the calculation.

However, the Danish Supreme Court decided that section 144 should be interpreted to require that treasury shares be included when calculating the total number of shares issued by the company.

The Danish Supreme Court emphasized that section 144 of the Danish Financial Services Act constitutes a intensive intervention in the rights of minority shareholders. Accordingly, any deviation from the wording of section 144 is only lawful if firmly supported by other sources of law.

Since the wording of section 144 did not exclude treasury shares and since no other sources of law firmly supported such alternate reading, the compulsory redemption was deemed unlawful. However, no monetary compensation was awarded, since no financial loss had been suffered.

Danish Provisions on Compulsory Redemption

Pursuant to section 70 of the Danish Companies Act of 2009 as amended, any shareholder holding more than 90% of the shares in a limited liability company and a corresponding share of the votes may demand that the other shareholders have their shares redeemed by that shareholder. This provision was first introduced by the Danish Act on Public Limited Companies of 1973.

A special provision applies according to section 144 of the Danish Financial Business Act with respect to banks that do not meet the capital requirement of section 127 of said act. In such cases, the Danish FSA may set a time limit for the re-capitalization of the bank. Following such decision by the Danish FSA, the board of directors of the bank may with a simple majority, upon the request of a shareholder owning 70% or more of the bank’s shares, decide to redeem the shares of the minority shareholders in the bank. This provision was first introduced as part of the Danish Banks and Savings Banks Act in 1998.

When the above provisions were introduced, it did not appear from their wording or the preparatory works, whether treasury shares should be included when calculating the total number of shares issued.

It has generally been assumed that treasury shares should not be included when calculating the total number of shares, since the general meeting of the company may decide to cancel such. Further, when the Danish Companies Act of 2009 replaced the Danish Act on Public Limited Companies of 1973, the preparatory works assumed that treasury shares should not be included when calculating the total number of shares issued by the company for the purposes of the compulsory redemption provisions in accordance with the general assumptions.

The Compulsory Redemption Court Case

The case was initially brought before the Eastern High Court of Denmark as a class action law suit by a group of minority shareholders, who argued that the compulsory redemption had not been lawful and that the price paid for the shares by the majority shareholder in connection with the compulsory redemption had not been correct.

The Eastern High Court and later the Supreme Court therefore had to consider the following matters:

1. Was the bank in distress to the effect that the compulsory redemption provisions of the Danish Financial Business Act could be used?
2. In the affirmative, did the majority shareholder meet the ownership requirement for carrying out a compulsory redemption of the minority shareholders, i.e. did the majority shareholder own 70% or more of the shares issued by the bank?
3. Was the price paid to the minority shareholders fair?

Financial Distress
The courts found that the bank had serious financial difficulties and unless the compulsory redemption was carried out, the bank would not have been able to continue its operations unless the compulsory redemption had been carried out. Accordingly, the bank was to be considered in distress for the purposes of section 144 of the Financial Business Act, allowing for the use of the compulsory redemption regime if the majority shareholder met the 70% ownership requirement.

Ownership
When calculating the ownership, the minority shareholders took the view that treasury shares should be included when calculating the total number of shares issued by the company. Accordingly, the ownership should be calculated as follows:

When using this calculation method, the majority shareholder would only own 67.33% of the shares, meaning that the requirements for carrying out a compulsory redemption were not met.

The majority shareholder argued that treasury shares should be disregarded, and that the ownership therefore should be calculated as follows:

This calculation method resulted in a 73.36% ownership.

The Eastern High Court and the majority of the members of the Supreme Court noted that it did not appear from the preparatory works to the Public Companies Act of 1973 or to the Financial Business Act, whether treasury shares should be included. The fact that the Companies Act of 2009 assumed that treasury shares – also pursuant to existing legislation – should be excluded did not carry any weight in this connection, since section 144 of the Financial Business Act was introduced prior to the Companies Act. Further, it was noted that no case law or administrative practice existed of relevance to the question at hand.

As a result, the case would have to be decided based on the wording of the provision, which did not exclude treasury shares. It was also considered that the involuntary share transfer which is part of a compulsory redemption constitutes an intensive intervention in the rights of the minority shareholders. Accordingly, any such obligation on the part of the minority shareholders must be firmly supported. The exclusion of the treasury shares would have made it easier for a majority shareholder to carry out a compulsory redemption than provided for by the wording of the provision in question and due to the lack of other sources of law providing for such easier access, the provision would have to be interpreted in favour of the minority.

Accordingly, the requirements for carrying out a compulsory redemption pursuant to section 144 of the Financial Business Act had not been met and the compulsory redemption was therefore unlawful.

Price
It should be noted that the minority shareholders did not request to have their shares returned to them – which would also have been somewhat difficult given the fact that the bank following the compulsory redemption had been merged with a major Danish bank resulting in the cancellation of the shares.

Instead, the minority shareholders argued that the price paid in connection with the compulsory redemption had been too low.

The Supreme Court noted that the shares would probably have been worthless if the compulsory redemption had not been carried out. Further, the fact that the compulsory redemption had not been lawful did not entitle the shareholders to a higher price than they would have been entitled to if the redemption had been lawful.

Accordingly, the minority shareholders were awarded no monetary compensation and no changes were made to the transactions with their shares or the ensuing merger.

Conclusion

Protection of Minority Rights
It is sometimes argued that a pragmatic view should be taken when considering whether certain formal requirements have been met to the extent relevant legislation leaves room for interpretation. In the case at hand, the bank could possibly have cancelled its treasury shares or disposed of them, thus eliminating the issue resulting in the court case.

This approach, however, tends to collide with the views of the courts, who are generally very concerned with ensuring that no intensive interventions are made in the rights of minority shareholders and other rights relating to property rights, unless such interventions are firmly based on relevant sources of law, see for example the now famous decision by the Eastern High Court in the matter of the compulsory redemption of shareholders in the Danish telephone company TDC. Case law in other areas demonstrates that this view is also held in other aspects of Danish law outside of the area of company law.

Compulsory Redemption under the Danish Financial Business Act
The Supreme Court has rejected that the preparatory works to the Danish Companies Act of 2009 can be used to interpret the intentions of the compulsory redemption provisions of the Danish Financial Business Act introduced in 1998.

Accordingly, any future compulsory redemption will need to comply with the strict 70% ownership requirement set by the Supreme Court, which will possibly require a cancellation of treasury shares in order to meet said requirement.

Compulsory Redemption under the Danish Companies Act of 2009
The preparatory works to the Danish Companies Act assume that treasury shares should be excluded when calculating the total number of shares issued by a company for the purposes of the general compulsory redemption provisions requiring a 90% ownership. It appears from the preparatory works that this statement is based on an assumption that exclusion of treasury shares in this connection is a principle of Danish company law already applicable prior to the passing of the Danish Companies Act.

However, the Eastern High Court and the majority of the Supreme Court found that no such general principle applies.

It will remain to be seen whether this case will result in changes to the Financial Business Act or the Companies Act. Until such time, a cautious approach will likely be taken with respect to the exclusion of treasury shares in similar transactions.