Whenever the majority tries to acquire the share of the minority against their will, a squeeze out occurs. A variety of squeeze out techniques resolve the corporate dispute and accomplish the removal of the minority through changes in corporate structure. As compared to the methods presented in my last installment, “The Siege”, squeeze outs based around restructuring rather than trying to persuade or coerce most often put the minority shareholder in the position where there is no other choice but to sell. In general, the squeeze out techniques described in this post all take advantage of the authority state and federal statutes grant to directors and majority shareholders during mergers, processes of amending corporate charters, and other restructuring processes.
When two companies merge, the board of directors of each company wield considerable control over the particulars of the resulting entity. In the process of reorganizing their company, the majority can effectively force minority shareholders to sell their shares. Most states grant to the directors organizing a merger the authority to force dissenting shareholders to accept buyout agreements. A less direct but still viable option is to set up the conversion of shares from the parent company to the merged company at terms that are unfavorable to the shareholder, thus further encouraging a sale of shares. Some states require that all mergers have a demonstrable business purpose to be approved, while others will not find fault with the majority shareholder who incorporates a new company just so it can merge with the old company and squeeze out minority shareholders. In all cases the common law concepts of fairness and fiduciary duty serve as guiding principles. Courts that have allowed mergers enacted solely to squeeze out shareholders without business purpose have ruled that so long as a shareholder receives fair price for their shares and in general has been dealt with fairly, no breach of fiduciary duty has occurred.
Squeeze out by merger is relatively simpler when the two companies merging are parent and subsidiary and the parent owns a significant majority of the subsidiary’s stock (over 90% in most states). These so called “short form mergers” require no vote by the subsidiary shareholders, but simply a resolution by the parent’s directors, paperwork filed with the state, and notification of the subsidiary shareholders. Those shareholders who dissent have the right to have their shares appraised and to be paid accordingly. Courts are generally less likely to intervene on the behalf of minority shareholders in short form mergers than in other merger situations.
Corporations may sell assets, dissolve, or otherwise restructure themselves so as to benefit the majority and oppress the minority. Rules governing such actions vary by state, but almost all require a majority or supermajority of shareholder support before any such action can take place. Majority among the directors is not sufficient. In general the goal in any of these scenarios is to shift and rearrange corporate assets to apply pressure to the minority. A corporation, for example, might decide to separate its assets, funneling the rewards of the profitable assets to the majority and likewise directing to the minority the results of the less favorable assets.
Changes to corporate bylaws or amendments, processes during which most states grant considerable favor and authority to the opinion of the majority, can be used to squeeze out minority shareholders. A variety of techniques may be used to alter the value, classification and rights of the minority’s shares. Bylaw modifications can similarly be used to aid other squeeze out techniques. Veto powers, for example, can be revoked, removing a roadblock to a merger or restructure. Bankruptcy and similar proceedings can also be used to enact a squeeze out.
In all the above cases, the main considerations remain whether or not the majority has breached their fiduciary duty. Although the courts recognize the principle of majority rule, no matter how small their claim a shareholder is still a shareholder, part owner of the company, and the directors of the corporation in which they own stock are obligated to act in the interest of the shareholders. Squeeze play that, in the eyes of the courts, serves to line the pockets of the majority at the clear expense of the minority is likely not to stand. Conversely, the misfortunes of a minority shareholder, if incurred as part of an operation which is seen to benefit the larger corporation, are almost guaranteed to be viewed as collateral damage.
For more information, contact Horowitz and Weinstein.
Next installment: Minutia