Withholding of benefits and corporate restructuring are the two main categories of squeeze out corporate disputes. A third category exists more or less encapsulating all the additional and ancillary techniques by which the majority can gain control of the minority’s shares. These are most often used in addition to other squeeze techniques. They are rarely sufficient on their own to get a minority shareholder to sell.
Subterfuge tends to play a key roll in any squeeze out. If a minority shareholder is unaware that the majority is seeking to squeeze them out they are less likely to make preparations to resist such an attempt. Rules vary by state, but directors are not always required to notify all shareholders when they hold meetings. Even if notification is given, the meeting could be held at a time or place inconvenient for the minority shareholder. Squeezing the minority out of their shares is made easier when the minority is not able to voice their opposition. This can likewise be accomplished by modifying corporate voting rules. Typically a minority with sufficient votes will have some representation on the board of directors. Modification to the voting rules can deny the minority this power and a minority without representation on the board of directors becomes much less able to resist squeeze play.
Denying dividends is a common squeeze tactic. Less common but very effective in the right situations is the threat of paying large dividends. This is most potent when the minority is in a higher income tax bracket than the majority. Large dividends to everyone will represent a greater loss in taxes to the minority in the higher bracket and this may be sufficient motivation to convince them to sell their shares.
A generally effective tactic, however it plays out specifically, is to wear out the minority shareholder, to erode their will to resist. This can be accomplished by dragging out legal processes, through overt hostility and disrespect, or by concealed or deceptive dealing.
No matter the tactic the chief risks remains a breach of fiduciary duty, the obligation of directors to act in the interest of the business, of the shareholders. Fraud is also a concern, especially in situations where information is intentionally withheld.
For more information on squeeze outs or other corporate disputes, contact Horowitz and Weinstein.
Next installment: Corporate Deadlock and Court Intervention