10.3 Third Party as a Source of Remuneration 345The main rule on the liability of the seller for the quality of shares is caveat emp-
tor (buyer beware) combined with the prohibition of fraud (section 16.2). On the
other hand, the seller can often be deemed to have agreed that the company, its
business, or the shares will be compatible with information disclosed by the seller.
For this reason, it is in the interests of both parties to agree on the disclosure of in-
formation, the liability of the seller for information, and the liability of the seller
for the quality of the company, its business and the shares.
Initial public offering (IPO) by the seller. An IPO represents an alternative to a
private sale. The use of an IPO depends on the preferences of market investors.
An IPO can be structured in many ways. (a) In a clean exit, a large shareholder
offers to sell all shares that he owns for cash. (b) The shareholder may prefer to
keep part of his holdings in order to signal the quality of shares; the potential buy-
ers’ perceived risk might be reduced if the buyers believed that the interests of the
seller have been sufficiently aligned with those of their own. (c) Partly for the
same reason and partly for the purpose of raising new capital, the firm might issue
new shares and offer them to the public at the same time as a shareholder offers
existing shares to the public. Potential investors might believe that their interests
have partly been aligned with those of the firm itself, because the firm will require
funding in the future and a decline in the value of the share after the IPO would
damage the firm’s reputation, increase perceived risk, and make it more expensive
for the firm to raise equity funding in the future. (d) The shareholder might also
decide to keep a substantial part of his shares. For example, the controlling share-
holder might prefer to change the nature of his holdings from illiquid to more liq-
uid and obtain a market valuation for the shares by floating part of them on a regu-
lated market.
Controlling shareholders may sometimes be able to choose between the IPO of
the firm and the sale of its assets. For example, an IPO is a way for a private-
equity group to realise the value of its goodwill; the group would not be able to re-
alise it just by divesting its portfolio companies.
Public offering by the seller. Where the shares have already been admitted to
trading on a regulated market, a large shareholder can make an offering to the
public for the sale of shares.
Public takeover offer. The public offer can be made by the buyer rather than a
shareholder contemplating the sale of his shares.
The Directive on takeover bids applies to takeover bids for the securities of a
company governed by the laws of a Member State where all or some of those se-
curities are admitted to trading on a regulated market.^80
Sell-out rights, squeeze-out rights. The existence of sell-out rights and squeeze-
out rights can make the sale or purchase of shares compulsory at the insistence of
the buyer (squeeze-out right) or the seller (sell-out right). The Directive on take-
over bids provides for limited squeeze-out rights and sell-out rights following a
public takeover bid.^81
(^80) Articles 1(1) and 2(1)(a) of Directive 2004/25/EC (Directive on takeover bids).
(^81) Articles 15 and 16 of Directive 2004/25/EC (Directive on takeover bids).