The previous posts in this series have primarily looked at squeeze play and similar situations through the eyes of the majority. Various scenarios have been framed in the context of strategies the majority may employ to the squeeze the minority out of their shares, and the avenues of remedy for the minority have been presented as risks to be planned for and avoided. For this final installment, the focus will now shift to the other side of squeeze outs, to the minority and how they may attempt to resist the majority’s push.
As previously stated, the laws governing corporate conduct are not nearly so concerned with sparing the minority from oppression by the majority as, for example, constitutional law is. Whereas the laws governing conduct between citizens are designed to balance majority rule with protection for the minority, in general corporate law is not concerned. There are three main avenue by which a minority shareholder may mount a legal case against a squeeze out.
The squeezee can attempt to show that the majority have acted illegally. Majority rule obviously does not permit a shareholder to violate federal or state laws. If the minority can demonstrate that the majority have committed fraud, perjury or otherwise broken the law, the grounds are set for court intervention into the company, almost certainly derailing the attempted squeeze out.
The concept of fairness is another recourse for the minority. Although not nearly as strictly or clearly defined as illegal action, accusations of unfairness can nevertheless still be a potent recourse for the oppressed minority. A group of shareholders who, through a merger, were forced to sell off their shares in a company could argue that because of the price they were given for those shares, they had been dealt with unfairly. Their years of service to the company entitled them to a fair price. The argument could also superseded mere considerations of price and instead focus on fair recompense for their years of service to their company. Such an argument’s weakness lies in the difficulty in pinning down just where the line lies between what is fair and unfair and deciding onto which side of that line a given action falls.
The most common and likely the most course of defense for a minority shareholder being squeezed is to seek to prove the majority have violated their fiduciary duty. Fiduciary, the obligation to act in someone else’s best interest, means in a corporate setting that the directors and officers of a company are expected and bound to act in the best interests of the business and of its shareholders. No matter what else, the oppressed minority remain shareholders and as such their wellbeing carries some weight. The minority will try to prove the majority have acted out of consideration for the wellbeing of their own personal finances, rather than the corporate good. Conversely, the majority may try to demonstrate how the minority are a detriment to overall good of the business, a drain or hindrance to the corporate enterprise.
Generally speaking, the advantage lies with the majority. As stated before and many times over, majority rule is rule number one. The minority in any type of squeeze out is, of course, not without options and there is no reason a minority shareholder must necessarily simply accept being squeezed out without retaliation. The courts have the power, given sufficient evidence, to intervene and override any type of squeeze play. Still, any oppressed minority shareholder should know that so long as the squeeze play does not violate any laws, does not treat the minority in a manner the courts deem as unfair, and does not constitute a violation of the majority’s fiduciary duty, the minority’s resistance to being squeezed will ultimately not prevail.
For more information on squeeze outs or other corporate disputes, contact the Chicago corporate attorneys at Horowitz and Weinstein.