A squeeze out or freeze out occurs when a majority party of the shareholders of a company (an individual or several individuals who together control a majority of the company’s shares) apply pressure to a minority shareholder with the intent of getting that shareholder to sell his or her shares. There is no always applicable answer to the legality of such actions. Shareholders have rights and actions that violate those rights certainly present a cause for legal action. The Illinois Business Corporation Act (BCA), for example, provides shareholders a right to review financial information of the company. If that access is not provided, that’s a more clear cut situation, but squeeze and freeze outs can often be murkier, especially if a compelling case can be made that the course of action was to the benefit of the company.
The possible methods of squeeze and freeze outs are vast. Some are fairly obvious, while with others the first difficulty for the minority party is realizing they’re being squeezed in the first place.
One method of squeezing a minority shareholder is called the freeze out merger. In order to push the minority shareholder out of the company, the majority party incorporates a new entity and initiates a merger with the first company. They exercise control over the merger process and use it to push the minority party out. The merger process can make things more obscure than they might be otherwise. Presumably much of the company will be in motion and the fate of one minority shareholder might not be so obvious.
However the squeeze or freeze out is attempted there are a few common points. Again, action which violates the rights of a shareholder, no matter the size of their share, violate the BCA and provide a course of action for the minority party. If no such right is violated, however, the conversation can often come down to questions of fairness (both in how the shareholder is treated and the price received for their shares) and the best interests of the company.
Horowitz Law Offices represents shareholders and partners to resolve their complex disputes. We have litigated numerous freeze and squeeze out cases to favorable outcomes. You are welcome to contact us at (312) 787-5533 or firstname.lastname@example.org