Chicago Business Disputes
Articles dealing with the relationship between majority and minority shareholders and partners will frequently use the terms freeze out and squeeze out interchangeably. We have in fact probably done so ourselves in some of our posts on this blog.
But is there an actual difference? A Harvard Law School discussion paper infers there is little difference between the two, that squeeze out is a less technically or broader term to refer to a freeze out. An article from the Washington University Law Review says that a freeze out is when the minority is eliminated from the company or partnership, while a squeeze out involves the neutralization of the minority’s rights.
We have represented numerous clients on various sides of squeeze and freeze out situations in companies, partnerships and other entities. With that background, we agree with Washington University that the two terms are not interchangeable (as Harvard maintained) but we tend to understand freeze and squeeze out in reverse to how Washington University defines them.
In our experience, a freeze out is a series of steps wherein the majority neutralizes the minority. This can take the form of enforcing bylaws, resolutions or rules that have not been before enforced. The majority can choose not to distribute dividends. They can promote other shareholders or partners but pass over the minority. The end goal is to try to get the minority to sell their stake in the company or partnership.
These actions are not necessarily ethical or a proper use of corporate power. They might constitute oppression of a minority shareholder’s rights or a violation of fiduciary duty. Situations that might seem unethical, however, may prove to be proper once all the facts are taken into account. Actions to remove an obstructionist shareholder, for example, or other freeze actions aimed toward the benefit of the business may be proper. Obviously the details can vary greatly from case to case.
The goal in a squeeze out, however, is to liquidate the interest of the minority. The methods are various and include mergers, recapitulations or liquidating down by bringing in additional equity owners. Here again, the squeeze out may be a legitimate and proper exercise of corporate power or it may unduly oppress the minority. It depends on the particulars of the case.
The primary difference is this. In a freeze out, the goal is to remove the minority, while in a squeeze out, the shareholder or partner remains involved in the business but with their influence reduce and minimized.
For more information on minority oppression, squeeze outs and freeze outs, other shareholder/partner disputes, or other corporate law concerns, you are welcome to contact us at (312) 787-5533 or firstname.lastname@example.org