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05 November 2003
Decree-Law 262/86, which approved the Portuguese Companies Code, introduced a statutory power allowing a party which makes a takeover offer and which acquires 90% or more of the shares in the target to squeeze out the remaining shareholders, as long as certain conditions are met.
However, numerous problems have arisen since this right was introduced, and many consider it to be illegal and unconstitutional.
The Portuguese ombudsman therefore requested the Constitutional Court to declare this provision unconstitutional.
Article 490 of the Companies Code provides that where an offeror acquires 90% or more of the target's shares, it may notify the remaining shareholders that it wishes to acquire their shares. It must subsequently sign a notarial deed for the purchase of the outstanding shares.
The offeror must notify the target that it has reached the 90% threshold within 30 days of the acquisition. For a six-month period thereafter, the offeror can elect to make a takeover offer for all remaining shares of the target in exchange for cash, shares or bonds. The consideration offered must be determined by an independent auditor, whose report must be submitted to the Commercial Registry Office and be made available for analysis at the head offices of the offeror and the target.
Moreover, in order to sign the notarial deed for the purchase of the outstanding shares, the offeror must first make a deposit of the highest amount of consideration contemplated in the auditor's report.
It is also possible for minority shareholders to oblige the offeror to acquire their shares in consideration for cash, shares or bonds, or under such other terms as are specified by the court, if applicable.
In his petition to the Constitutional Court, the ombudsman argued that Article 490(3) of the Companies Code infringes a number of constitutional rights, liberties and guarantees. The ombudsman argued that Article 490(3) is both formally and materially unconstitutional, since it breaches Articles 168(1)(c), 18(2) and 62(1) of the Portuguese Constitution.
The ombudsman alleged, explicitly or impliedly, that Article 490(3) facilitates a private expropriation and therefore breaches a private property right.
If Article 490(3) is understood to breach a private property right, and thus deals with constitutional rights, liberties and guarantees, it should have been approved not by a government decree-law, but rather by a parliamentary law.
However, the Constitutional Court ruled that Article 490(3) does not allow a 'private' expropriation of minority shareholders' property rights; it rather comprises a 'submission' attached to the corporate property rights.
Therefore, Decree-Law 262/86, which introduced Article 490(3) of the code, is valid.
The ombudsman further alleged, explicitly or impliedly, that Article 490(3) breaches three constitutional principles:
Private property principle
As noted above, the court maintained that compulsory acquisition involves a 'submission' attached to the corporate property, and not a private expropriation, and thus does not breach the constitutional private property right.
Under the equality principle, the legislature must deal with equal matters in an equal manner, and with different matters in different ways.
The right of an offeror which acquires 90% of the target's shares to squeeze out the minority shareholders should thus be compared with the 'submission' of the minority shareholders to be bought out by the offeror.
The court added that Article 490(3) deals specifically with companies, which operate according to the principles of majority and majority share value.
Article 490(3) would breach the equality principle only if it allowed the offeror to acquire some, and not all, of the minority shareholders' shares.
The proportionality principle encompasses the following further principles:
Again, the court ruled that Article 490(3) does not breach the proportionality principle as it complies with all its requirements.
The Constitutional Court has decided that Article 490(3) of the Companies Code is constitutional. Although the decision does not always give a clear explanation of the reasoning which supports this conclusion, the main purpose of Article 490(3) has been upheld.
Therefore, the offeror's right to squeeze out the minority shareholders allows
the offeror to acquire 100% of the target and pursue a group strategy without
being blocked by dissenting minority shareholders.
For further information on this topic please contact Diogo Perestrelo at Goncalves Pereira, Castelo Branco e Associados by telephone (+351 21 355 3800) or by fax (+351 21 353 2362) or by email (firstname.lastname@example.org).
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