"Squeeze out" in Russian legislation

In English “Squeeze out” means displacement, extrusion. It is the procedure of mandatory re-purchase of securities which belong to minority shareholders by majority shareholders without the consent of minority shareholders.

The Company Law of Russian Federation provides for the possibility to repurchase the remaining securities upon the request of a person possessing 95% of open joint stock company shares. But in reality, such procedure causes a lot of controversial issues demanding precise explanation.

The difficulties arising from the procedure of repurchase of open joint stock company shares upon the request of majority shareholder are determined by the necessity to simultaneously observe a set of conditions.

First, oneshoulddetermine the scope of people having the right to claim for minority shares repurchase. Basis Federal Law “The Company Law” the right to claim for shares’ repurchase has:

• A person who became the owner of more than 95% of shares (shares belonging to this person or to his affiliates included) as a result of voluntary offer to purchase all securities of open joint stock company (in case not less than 10% of the total amount of shares was purchased as a result of voluntary offer acceptance).

Voluntary offer is to be forwarded to an open joint stock company by a person willing to buy more than 30% of the shares. The terms for voluntary offer acceptance are pointed out in the offer itself and cannot be less than 70 days and cannot exceed 90 days from the moment of voluntary offer receipt by open joint stock company.

• A person who became the owner of more than 95% of shares (shares belonging to this person or to his affiliates included) as a result of a mandatory offer (in case not less than 10% of the total amount of shares was purchased as a result of mandatory offer).

Mandatory offer to purchase shares is to be forwarded to joint stock companyby a person who bought more than 30% of joint stock company shares. The person shall forward the offer within 35 days from the moment of making the entry on the personal account (or from the moment the person came to know that he possess more than 30% of shares). The terms for mandatory offer acceptance are pointed out in the offer itself and cannot be less than 70 days and cannot exceed 80 days from the moment of mandatory offer receipt by open joint stock company.

The above mentioned person has the right to forward the claim to the joint stock company for purchase of the shares from minority shareholders within six months from the moment the term for voluntary or mandatory offer acceptance for purchase of all securities of a joint stock company expires.

It should also be noticed that according to Federal Law dd.05.01.2006 No.7-FZ “On the introduction of amendments to Federal Law “The Company Law” and some other legislative acts of Russian Federation” those persons who as of July 1st, 2006 had more than 95% of the shares of the joint stock company received the right to claim for remaining shares repurchase until August 1st, 2008. Upon preclusive term expiry those persons lost the right. It happens so that for majority shareholder to be able to claim for the remaining shares repurchase from minority shareholders it is needed that a majority shareholder had less than 95% of shares of a joint stock company as on July 1st, 2006.


It seems that majority shareholders’ right for mandatory repurchase of the shares in case it does not contradict to the legislation in force surely derogates from the rights and interests of minority shareholders. But no matter how strange it seems, it is not true. In case one of the shareholders has quite a large quantity of the shares, shares of a company may loss their liquidity. Herewith, other shareholders lose their chances to sell their shares at a favorable price. Such procedure is aimed at execution of a tight control over the prices and shares’ repurchase terms which shall offer the most favorable terms for minority shareholders.

It should be noted that Federal Law dd.05.01.2006 No.7-FZ “On the introduction of amendments to Federal Law “The Company Law” and some other legislative acts of Russian Federation” contains a separate article governing state control over open joint stock company shares purchase. Namely, the claim for securities repurchase prior to sending it to the open joint stock company shall be submitted to Federal Securities-Market Agency . In addition, independent valuer’s report on the commercial value of redeem shares shall be attached to the claim for securities repurchase. All the said acknowledges minority shareholders’ protection mechanism availability in case of “squeeze out”.

The law-maker provides a minority shareholder with the right to claim for the repurchase of the securities he owns. Such claim shall be forwarded to a majority shareholder who received the right to repurchase remaining shares of open joint stock company due to the fact that he already bought more than 95% of open joint stock company shares. The claim can be submitted within one year from the moment a minority shareholder came to know about his right to claim for shares’ repurchase but not earlier then 35 days from the date a majority shareholder purchased the corresponding amount of securities of an open joint stock company. The indicated period is preconditioned by the fact that a person who became the owner of more than 95% of the total shares’ amount of an open joint stock company shall notify the owners of the securities having the right to claim for shares’ repurchase about such illegibility.

We should not forget that majority shareholders also have a number of “privileges”. For example, the legislation does not provide for explicit prohibition of mandatory shares’ repurchase from those shareholders who ignored a majority shareholder claim for shares’ repurchase. Failure to provide the information on bank details or mail payment remittance address for the repurchase of shares also does not infringe the right for mandatory shares’ repurchase. In this case a majority shareholder shall deposit the money for redeemable shares with a notary at open joint stock company location. In case the shares are held by a nominee shareholder on behalf of others, and the nominee shareholder refuses to disclose the information about the others, a majority shareholder shall transfer money for redeemable shares to the nominee shareholder. The redeemable securities charge off the personal account of the nominee shareholder is the basis for nominee shareholder to make an entry about the termination of the right for the corresponding securities on securities account of a client (bailor) without his instructions.

So, the consent of minority shareholders for the transfer of ownership for redeemable shares is not required. Documents witnessing the payment for the shares by their owners are only required. This protects the buyers from unfair practice of minority shareholders. The established judicial practice assumes that in order to carry out the bargains on securities repurchase, the wiliness of a minority shareholder is not required. By doing so, the risks connected with subsequent possible filing of a claim on bargain nullity action by minority shareholders who ignored the claim for shares’ repurchase will be minimized.