What is Compulsory Acquisition of Shares in England?

As a company, you should be aware of how one company can acquire another. This can help your business if you decide to take over another company or if your business has to defend itself from a takeover. Compulsory acquisition of shares is a technique to remove the problem of non-accepting shareholders of a takeover. It applies to minority shareholders who hold 10% or less of the shares. 

This article will explain in more detail what compulsory acquisition of shares is, how it works, and how it might occur. 

What is Compulsory Acquisition of Shares?

A compulsory acquisition of shares (or a ‘squeeze-out’ of minority shareholders) occurs where a bidder in a takeover for a company has: 

• the acceptance of at least 90% of shares; and 
• 90% of the voting rights in the company it is trying to buy. 

The buyer can then provide compulsory acquisition notices to the remaining shareholders of any shares the buyer has not acquired. 

The effect of this is that minority shareholders who refuse to sell their shares in a company are required to sell their shares. However, this is provided that the buyer has acquired the remaining 90% of the shares in the company. Notably, the aforementioned 90% of shares must be in the company itself, rather than 90% of the total issued share capital. 

What is a Takeover Offer?

To constitute a takeover offer, your offer must fulfil several requirements. Generally, you must make an offer to acquire the entire share capital. This capital almost always manifests in the form of cash consideration. You must also make the offer with the same terms to all shareholders. 

However, suppose there are different classes of shares within the company. This may occur if there are many shareholders in the company. In this case, you must issue the same terms to all shareholders within that class. 

Further, you must make a direct takeover bid. In one case, the court decided that an invitation to shareholders to tender their shares to the prospective buyer did not amount to an offer. Therefore, the buyer could not serve compulsory acquisition notices. 

What is the Compulsory Acquisition Process?

Provided that you meet the requirements for triggering a compulsory acquisition, you can then serve a notice. You must do so before the limitation period of three months from the last day the offer can be accepted. If you are not dealing with a company that can trade securities on a UK market, then the period is six months. The offer you must serve is a Form 980(1), which is a statutory notice. You must serve it to all of the shareholders to whom your offer relates. 

After this, the next step is to send a copy of your first notice to the target company. You should serve this alongside a Form 980. This form should contain and declare all relevant conditions of the compulsory acquisition notice.  

Once the notices have been served, the buyer can pay the cash consideration in exchange for the shares within six weeks. 

It is also worth noting that a minority shareholder can also require a buyer making a takeover offer to acquire their shares if they wish. This prevents minority shareholders from being disadvantaged by a takeover offer and allows them to sell their shares and get out of the company. The Companies Act 2006 outlines this ability. 

Are There Any Alternative Options to a Compulsory Acquisition?

In some cases, the maker of a takeover bid may wish to use a scheme of arrangement rather than the compulsory acquisition process. 

Schemes of arrangement are also designed to remove minority shareholders. This is where the target company arranges with its shareholders to accept a takeover offer. This is binding, provided that it is approved by a majority in number representing at least 75% in value of the shareholders voting at a meeting. Further, a court must then sanction the scheme.

A scheme of arrangement is sometimes preferable if the target company buyer cannot reach the 90% shareholding necessary to trigger a compulsory acquisition, but the reason for not reaching the 90% is not because of a dissenting minority. For example, this reason may be inactive shareholders in the company.

Key Takeaways

As a business considering a takeover bid of an overwhelming majority of shares in a company, it is useful to know of your options to ‘squeeze out’ minority shareholders. One option is a compulsory acquisition of shares. You can trigger a compulsory acquisition if you have over 90% of the shares in the company that you are trying to buy. You can trigger a compulsory acquisition in relation to different share classes. Overall, you may be able to acquire a company’s entire shareholding through a compulsory acquisition. Therefore, this is an effective strategy to totally take over a company you are in the process of acquiring. 

In the alternative, you may wish to use a scheme of arrangement. This is particularly useful if you cannot reach the 90% threshold and there is no dissenting minority. 

If you have any questions about the compulsory acquisition of shares, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.

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