In many previous posts on this site, we’ve discussed squeeze and freeze out situations, dispute between partners or shareholders that involve a majority coercing a minority, generally with either the goal of forcing the minority to sell their stake in the company or diluting their influence so they have effectively no say in how the company is run. Such actions, it should always be remembered, are not necessarily in and of themselves illegal or legal. A squeeze undertaken for a legitimate business purpose, for example, would likely be found valid by the courts.
In this post, we’ll discuss some of the possible remedies the minority in a squeeze situation can employ, the possible strategies for resiting the squeeze or freeze and retaining stake and influence in the company. Broadly speaking, there are three main ways a minority, the party being squeezed, can mount a legal defense against the squeezing majority.
The minority 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 The argument could also superseded mere considerations of price and instead focus on fair recompense for their years of service to their company.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.
Horowitz Law Offices represents shareholders and partners in connection with various disputes, squeeze out situations, and litigation. You are welcome to contact us at (312) 787 5533 or firstname.lastname@example.org.