How much is my share still worth? For minority shareholders, this is the key question in a squeeze-out. The answer usually lies between two figures: the market price and the capitalised earnings value. The market price is regarded as the lower limit - the amount a shareholder could realise when selling their shares on the stock exchange. The capitalised earnings value, on the other hand, is based on the expected future profits of the company, discounted to the present day.

The challenge here: „The capitalised earnings value method is based on numerous assumptions,“ says Frederik Ruthardt, auditor at RSM Ebner Stolz and member of the Business Valuation and Business Administration Committee of the Institute of Public Auditors in Germany (IDW). As even small changes to individual parameters have a value effect, these are often controversial. 'For minority shareholders, this harbours an opportunity, for majority shareholders, uncertainty.

Severance payments can be the subject of excellent disputes, sometimes lasting for years. „The compensation is subject to judicial review,“ explains Alexander Kiefner, partner specialising in corporate law at White & Case. „There are squeeze-outs that keep the courts busy for more than ten years.“ Specialised hedge funds like to get involved in takeover situations in order to speculate on rising severance payments.

However, there is hope that this form of arbitrage will soon decrease. Two decisions by the Federal Court of Justice on the domination and profit and loss transfer agreement at WCM Beteiligungs- und Grundbesitz AG and the squeeze-out at Kabel Deutschland have recently pushed the discussion among lawyers and auditors in a new direction. This is because the court has pointed out an alternative to the prevailing focus on the capitalised earnings value method: „In both decisions, the Federal Court of Justice has clarified that the stock market price is generally recognised as an independent valuation method,“ says Kiefner.

This could speed up taking-private projects in future. However, the Federal Court's landmark decision raises follow-up questions for auditors. „As an auditor, I have to use economically sensible criteria to decide when to give more weight to the share price and when to the capitalised earnings value,“ explains Ruthardt. In order to provide guidance to colleagues, the IDW is now developing a new standard; it is currently known as draft standard IDW ES17. Auditors who are commissioned by a court to assess the fairness of a severance payment can use it as a guide. „Anyone advising a majority shareholder in a squeeze-out procedure will also look at this draft,“ expects Ruthardt.

In the draft standard, the IDW working group has opted for a traffic light system. The more criteria are green, the better the flow of information - and the more weighting can be given to the share price. For example, the shareholder structure, the liquidity of the share, the market coverage, the scope of company reporting, the development of the general conditions between the stock market price date and the valuation date and any price influences are taken into account.

The more factors are in yellow, the more the capitalised earnings value should be included in the decision. If, for example, a shareholder has a clear information advantage, there is no liquid trading in a share or there are even known violations of the Market Abuse Regulation, this would seriously jeopardise the validity of the market value - in these cases, the traffic light turns red. „The objectified company value determined using the capitalised earnings value method then becomes the decisive factor,“ explains Ruthardt.

The auditor sees the possibility of all criteria being green in the case of DAX companies, for example. They are regularly reported on, the shares are liquid and the listing on the regulated market is accompanied by information obligations. In most cases, some yellow factors are likely to appear, Ruthardt expects. „Then the auditor has to decide how to weigh up the stock market value against the capitalised earnings value.“

For lawyer Kiefner, it is crucial that the opportunity to give greater weight to the share price is utilised without falling back into old patterns: "The point is not to spend years in court discussing individual parameters of the capitalised earnings value when a yellow criterion appears,' he warns. The aim is for judges to be able to form an opinion on an appropriate level of compensation without slipping into lengthy detailed considerations.

Ruthardt observes that auditors are already increasingly looking first at the stock market price in valuation reports and then using the capitalised earnings value as a second step to check plausibility. However, there is a great desire for more standardisation in this still new approach. In the coming weeks, the IDW will be fine-tuning the draft; practitioners have until August to provide feedback on the proposal. The standard will then be finalised.